The UK’s governance watchdog is pushing ahead with new guidance clarifying that non-executives can receive part of their pay in shares.

The move follows the government announcing its support for share-based payments last month as part of its action cutting the UK’s regulation of business.

Richard Moriarty, chief executive of the Financial Reporting Council, said this week that payment in shares would be acceptable as long as companies maintain “transparency about their rationale and approach.”

Moriarty said: “The UK Corporate Governance Code’s comply or explain approach gives companies the flexibility to adopt governance practices that work for their specific circumstances and is a key asset for the UK in terms of its international competitiveness. We want to encourage boards to use this flexibility thoughtfully.

“This update will reinforce that companies can take varied approaches to structuring remuneration, provided they preserve director independence and are transparent with shareholders about their decisions.

“One size doesn’t fit all so good governance is about finding the right approach for your company.”

The Treasury touted the clarification in October as part of further additions to the government’s Regulation Action Plan.

The chancellor, Rachel Reeves, has famously said regulation is a “boot on the neck of business.”

In the past, there have been concerns that shares could challenge the independence of non-executives. Provision 10 of the UK code suggests shares could “impair, or could appear to impair, a non-executive’s independence.”

However, as Moriarty points out, the code is based on a “comply or explain” principle, which offers boards flexibility.

All in the explanation

When the code was updated in 2024 the FRC took steps to reiterate the “comply or explain” nature of the code after complaints that “compliance” was now expected by investors.

At the time, Moriarty said: “Frankly, a good explanation illustrates better governance more than situation where a board defaults to compliance with a specific code provision that manifestly doesn’t suit its circumstance but where the board lacks confidence to make the explanation.”

New guidance for the code now reads that “boards may choose to pay non-executive directors a portion of their fees in shares (for example, purchased at market price).

“In such circumstances, a description outlining the rationale and process for allowing a portion of non-executive director fees to be paid in shares, along with any associated restrictions on the sale of the shares, helps to ensure clarity for stakeholders.” The FRC adds that shares used as payment should not be “performance related”.

The new guidance may open up opportunities for some companies looking to attract top talent. However, there will be a “burden”: explaining why shares are a useful option. Annual reports will make for interesting reading.