UK Directors Face Pay Overhaul in Bid to Focus on Long-Term Futures of Firms

The bosses of Britain's listed companies face pay overhauls under new rules in a bid to ensure remuneration policies are designed with the long-term success of companies in mind.

The Financial Reporting Council, the UK's financial reporting regulator, said listed companies should publish a "viability statement" in their reports to investors, which will look ahead "significantly longer than 12 months".

The move, part of the UK corporate governance code, means directors will also have to provide an "improved and broader" assessment of long-term solvency and liquidity.

The FRC said firms should put claw-back arrangements in place to enable them to recover or withhold variable pay "when appropriate to do so" from directors.

"The changes to the code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation," said Stephen Haddrill, chief executive of the FRC.

"Crucially, the directors should explain their reasoning to investors.

"If included in the strategic report, their statements will be subject to a safe harbour in accordance with companies' legislation."

The FRC also stressed the code will continue to operate on the principle of "comply or explain".

Dr Roger Barker, director of corporate governance at the Institute of Directors, welcomed the report but expressed concerned around the FRC's "viability statement".

"We are supportive of a greater emphasis on ensuring that remuneration policies are designed with the long-term success of the company in mind," Barker said.

"The code is right to encourage companies to recover or withhold variable pay when appropriate to do so and to carefully consider appropriate significant vesting and holding periods for deferred remuneration.

"Where we continue to have concerns relates to the need for companies to publish a 'viability statement' in the strategic report which will look ahead 'significantly longer than 12 months'. The future is inherently uncertain and companies do not have crystal balls."

The announcement comes after the Bank of England unveiled tougher rules on bankers' bonuses.

The central bank said lenders could have their bonuses clawed back for up to seven years.

The move is designed to prevent the types of lending and borrowing behaviour that led to the financial crisis of 2008.