Directors Remuneration: Pay, Benefits & Compliance

Directors’ remuneration refers to the compensation provided to company directors for their roles and responsibilities. It typically includes a combination of salary, bonuses, benefits, share options and pensions. For publicly listed companies in the UK, directors’ remuneration must align with corporate governance guidelines and reflect the company’s performance and strategic objectives.

Determining appropriate remuneration is essential for attracting and retaining talented directors while ensuring fairness and accountability. Employers must consider the UK Corporate Governance Code, which emphasises transparency and shareholder engagement in setting remuneration policies. Companies are required to disclose directors’ pay in their annual reports, providing shareholders with the opportunity to assess its appropriateness.

 

Directors’ remuneration regulations

 

A number of regulations apply to how directors can be compensated, as well as best practices which together help ensure fair reward for directors’ contribution while protecting the company’s assets and interests.

 

Companies Act 2006 – model articles of association

 

The Companies Act 2006 model articles of association will apply if a company has not implemented their own rules on how the organisation is governed and operated.

Model articles for companies incorporated on or after 28th April 2013, set out requirements relating to director’s remuneration and state that directors are entitled to the amount of remuneration arbitrated by the board of directors for their director services to the company, and for any other service they perform for the benefit of the company. Reasonable expenses may also be claimed by directors if they have been properly incurred during the discharge of directors’ responsibilities and the exercise of those powers.

The Companies Act 2006 sets out requirements for listed companies surrounding the remuneration of directors, including obligations to prepare and produce a directors’ remuneration report. There is also an obligation to provide the same information in the company’s strategic report and accounts.

Listed companies feature on the Financial Conduct Authority’s (FCA) official list to trade on the stock market for public trading in the UK.

 

Companies (Miscellaneous Reporting) Regulations 2018

 

These regulations place obligations on the information a quoted company should include within the directors’ remuneration report, for financial years on or after 1st January 2019.

A quoted company’s share capital is included in the FCA’s official list, or one that is officially listed or admitted dealing in an EEA state, the Nasdaq, or the New York Stock Exchange.

The 2018 regulations were amended by the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 and extended to include certain regulatory obligations to ‘unquoted’ traded companies for financial years commencing on or after 10th June 2019.

A traded company’s shares hold voting rights at general meetings and have been admitted to trading on an EEA state regulated market.

 

The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019

 

These regulations amend the Companies Act 2006 and apply to UK incorporated quoted and traded (whether quoted or unquoted) companies. They require these types of company to report to their shareholders on statutory directors’ remuneration within both its remuneration policy and directors’ remuneration report. The regulations also convey upon the shareholders a right to vote on and approve the directors’ remuneration policy at least every three years. Each year, the shareholders have the right to an ‘advisory’ vote on the directors’ remuneration report.

 

UK Corporate Governance Code

 

The UK Corporate Governance Code is a set of standards published by the Financial Reporting Council (FRC) that aims to promote accountability, transparency, and long-term sustainable success for companies. It applies primarily to companies with a premium listing on a UK regulated market, such as the London Stock Exchange, and is designed to align with the UK Listing Rules (LR).

Companies with a premium listing are required to comply with the UK Listing Rules, which incorporate the provisions of the Corporate Governance Code, alongside EU and additional UK-specific requirements. These companies must apply the “comply or explain” principle, whereby they either comply with the Code or explain deviations in their annual reports.

Companies with a standard listing are only required to meet EU-imposed legislative obligations and are not bound by the additional requirements of the Code.

The Code applies under the following versions:

 

• 2016 Code: Applicable to financial years starting on or after 17 June 2016 and before 1 January 2019.
• 2018 Code: Introduced significant updates to focus on long-term value creation, corporate purpose, stakeholder engagement, and board diversity. Applicable to financial years commencing on or after 1 January 2019.
• 2024 Code (Revised): Effective for financial years starting on or after 1 January 2025, with additional provisions (such as Provision 29) applicable from 1 January 2026. The 2024 Code enhances focus on:

• • Internal controls: Boards must declare the effectiveness of material internal controls.
  • Risk management: Emphasis on accountability for financial and non-financial risks.
  • Enhanced transparency in governance practices.

 

 

Developing a directors’ remuneration policy

 

When drafting your company’s directors’ remuneration policy, key considerations such as how each individual director’s remuneration is arrived at by building upon a transparent and clearly defined framework used to calculate it, illustrates good corporate governance regimes and compliance with UK legislation.

Any company that is required to establish a directors’ remuneration policy needs to have it approved by their shareholders at least at three-yearly intervals. If a company already had in existence a remuneration policy on 10th June 2019, that policy can continue for the rest of its three-year period.

The directors’ remuneration policy must also contain a future policy table which sets out in detail each part of the package that makes up a directors’ remuneration. For each package, the table needs to include details of the purpose of the remuneration, exactly how it supports the company’s strategic goals, how it works in general, how performance is assessed (including differently weighted areas of performance), and any rights of the company to retain, withhold, or recover payments. Further general aspects include:

 

• A detailed explanation of the decision-making process behind the policy, and how the company intends to implement and review it going forward.
• The measures the company has put into place as to how it intends to manage any conflicts of interest arising from the policy.
• The role of the remuneration committee (and other related committees).
• A detailed statement setting out how the various parts of the directors’ remuneration package are put together and how the company intends to agree each component part. It should also include the maximum level of remuneration (this can be monetary or include other additional benefits) and the level of payment for stipulated minimum performance. A company should specify the performance targets for each statutory executive director used in determining remuneration for more than one financial year. The policy should also clearly state the ceiling on the remuneration available to each director, on the assumption that the company’s share price has grown by 50% during the applicable performance timeframe.
• Provide any information on share options or shares which have been awarded to the directors, including any holding or deferral periods, or the relevant periods.
• The duration of the director’s service contract, and any obligations within that contract which may impact that particular directors’ remuneration or loss of office payments.
• Details of where the directors’ service contracts and letters of appointment are kept should also be marked down.

 

Any significant changes in a directors’ remuneration policy from one financial year to another should be highlighted and explained. What constitutes a ‘significant change’ is not defined within the legislation, however, several UK advisory groups and industry bodies offer guidance on how the threshold should be interpreted.

More recently, regulatory changes have required directors’ remuneration policies to be assessed within the wider context of the company’s workforce as a whole. Companies are now required to make a statement about the company’s pay policy publicly available, including:

 

• The influence of the employee pay policy as a whole on the directors’ remuneration policy
• If the company consulted its employees when drafting the directors’ remuneration policy and if so, the manner in which those consultations took place
  A comparison of the methods of calculation and its measures (if any) between the policies and an explanation as to the reasons why

 

Ideally, directors should engage with the workforce to enable them to raise any concerns they have on the remuneration policy. It is recommended that a company’s remuneration committee should not only review workforce remuneration and related policies, but also set remuneration for senior management taking the culture of the company into its remuneration forecasts. Executive directors’ pension commitments and/or payments in lieu, should also be compared, and if necessary, adjusted in accordance with the pensions available to the entire workforce.

 

Determining directors’ remuneration

 

Largely, it is the company itself that determines and pays the remuneration of its directors, mostly in accordance with service contract provisions. Increasingly, however, several stakeholders (particularly for listed companies), the company’s employees, and the remuneration committee, contribute significantly to the decision-making process.

The remuneration committee’s role is to ensure that director’s remuneration is aligned to the company’s purpose, strategies, and long-term success. It composes of at least three independent non-executive directors (or two for smaller companies below FTSE 350) but does not include the chairperson of the company’s board of directors. And a Chairperson who is also an independent non-executive director. The chairperson of the company’s board of directors can only be a member if they are independently appointed by the company – they are not allowed to chair the committee.

The committee should meet at least once a year to review the directors’ remuneration report prior to it being put forward to the shareholders for approval. Minutes and attendance records should be taken of all meetings and forwarded to the board of directors (providing there is no conflict of interest). The committee should address the following principles and provisions:

 

• Decide the remuneration policy for each director and decide the remuneration of the chair, executive directors, and senior management.
• The board should be able to override any formulaic remunerative calculations.
• Develop a policy on post-employment shareholdings.
• Exercise independent judgment and discretion when approving directors’ remuneration considering company performance and that of each individual director, including any other relevant circumstances.
• The Chairperson of the committee must have previously served for at least 12 months on a remuneration committee prior to their appointment.
  Non-executive director remuneration must be determined in accordance with the company’s articles of association or by the board, reflecting their time commitments and responsibilities.
• Any remuneration consultants appointed by the committee should be disclosed.
• The company should encourage long-term shareholdings and share award schemes as alternative remuneration for directors as this gives the workforce actual shares released on a phased basis, promoting long-term continuous performance of the company.

 

How directors’ remuneration is calculated will vary from company to company and likely to be based on the circumstances of each prevailing financial year. At its very core, the remuneration policy should reflect the strategy and values of the company with each individual policy tailored to promote ongoing successes of the company.

 

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DavidsonMorris’ human resource specialists work with employers to ensure best practice in HR and people management, including areas such as executive and director reward and remuneration. We offer a holistic solution to support legal risk management while protecting the best interests of the organisation. For advice on a specific issue, speak to our experts today.

 

Directors’ remuneration FAQs

 

What is directors’ remuneration?

Directors’ remuneration refers to the compensation directors receive for their role, which may include salary, bonuses, benefits, pensions, and share options.

 

What guidelines govern directors’ remuneration in the UK?

The UK Corporate Governance Code outlines principles for setting directors’ pay in publicly listed companies, emphasising transparency, fairness, and alignment with company performance.

 

Do private companies need to disclose directors’ pay?

Private companies have fewer disclosure obligations than publicly listed ones, but they are required to report directors’ remuneration in their annual financial statements.

 

What are the key components of directors’ remuneration?

Remuneration typically includes fixed elements like salary and pensions, as well as variable components like performance-based bonuses and share options.

 

How is directors’ remuneration determined?

Remuneration is typically set by a remuneration committee, which evaluates market benchmarks, company performance, and the director’s responsibilities.

 

What are the risks of poorly designed remuneration policies?

Risks include shareholder dissatisfaction, reputational harm, or incentivising short-term decision-making that conflicts with long-term goals.

 

How can companies ensure fairness in directors’ pay?

Employers should link pay to company performance, conduct regular policy reviews, and maintain open communication with shareholders to ensure remuneration is perceived as fair.

 

What role do shareholders play in directors’ remuneration?

Shareholders in publicly listed companies vote on the remuneration policy and annual report to express approval or concerns about directors’ pay.

 

Are there limits on directors’ remuneration?

There are no statutory limits, but pay must be justified, reasonable, and aligned with the company’s performance and objectives.

 

How often should directors’ remuneration be reviewed?

Remuneration policies should be reviewed annually to ensure they remain competitive, compliant with regulations, and aligned with organisational goals.

 

Glossary

 

Term	Definition
Directors’ Remuneration	The compensation paid to directors for their roles and responsibilities, including salary, bonuses, and benefits.
Remuneration Committee	A committee typically within publicly listed companies responsible for setting and reviewing directors’ pay and policies.
Fixed Remuneration	The guaranteed part of a director’s pay, such as salary and pensions, not tied to performance.
Variable Remuneration	Performance-based elements of pay, such as bonuses and share options, which depend on meeting specific targets.
Share Options	A form of variable pay that gives directors the right to buy company shares at a predetermined price, often as an incentive.
UK Corporate Governance Code	A set of principles and guidelines for publicly listed companies to ensure fair and transparent governance, including directors’ pay.
Performance Metrics	Criteria used to evaluate a director’s contribution to the company, influencing variable remuneration.
Stakeholders	Individuals or groups with an interest in the company’s performance, such as shareholders, employees, and customers.
Disclosure Requirements	Legal obligations for companies to report directors’ remuneration in annual reports or financial statements.
Alignment with Performance	The principle that directors’ pay should reflect the company’s financial results and long-term goals.
Shareholder Engagement	The process of consulting with and seeking approval from shareholders regarding directors’ remuneration policies.
Annual Remuneration Report	A section of a company’s annual report detailing directors’ pay, performance links, and compliance with governance standards.
Excessive Pay	Compensation perceived as disproportionately high compared to company performance or industry standards, often leading to shareholder dissatisfaction.
Long-Term Incentive Plan (LTIP)	A scheme designed to reward directors for achieving long-term strategic objectives, often involving share-based rewards.
Benchmarking	Comparing directors’ pay against industry standards to ensure competitiveness and fairness.
Malus and Clawback Provisions	Clauses allowing a company to reduce or recover bonuses or incentives in cases of misconduct or poor performance.
Conflict of Interest	A situation where a director’s personal interests may interfere with their duties, relevant in setting remuneration.
Reputational Risk	The potential damage to a company’s reputation due to perceived unfair or excessive directors’ pay.
Compliance	Adhering to legal and regulatory requirements for directors’ remuneration policies and practices.