Director Remuneration Policy Disclosure Framework for Prospectuses

The Hong Kong Stock Exchange (HKEX) has materially escalated its scrutiny of director remuneration disclosures in listing applications over the past 18 months, a shift driven by the Listing Division’s 2024 thematic review of prospectus disclosure quality. The review, published in Q1 2025, identified director remuneration as one of the top three areas where draft prospectuses from 2023 and early 2024 failed to meet the “clear, concise, and complete” standard required under Listing Rules Chapter 11. Specifically, the HKEX found that 42% of sampled prospectuses omitted the individual remuneration breakdown for each director, instead providing an aggregate figure — a practice the Exchange now deems non-compliant with Rule 11.07. For CFOs and company secretaries preparing for a Main Board or GEM listing in 2025-2026, the margin for error has narrowed. The SFC’s 2024 Code of Conduct amendments, effective 1 January 2025, further require sponsors to certify that all director remuneration policies disclosed in the prospectus are consistent with the issuer’s constitutional documents and board resolutions. This article provides the exact disclosure framework — covering policy structure, individual breakdowns, comparative benchmarking, and post-listing commitments — that issuers must embed in their prospectuses to avoid a Section 86(1) requisition letter from the HKEX.

The Regulatory Baseline: What the Listing Rules and SFC Code Now Demand

Director remuneration disclosure is no longer a boilerplate exercise. The HKEX’s 2024 thematic review, combined with the SFC’s updated Sponsor Code provisions, has created a two-tier compliance burden: the issuer must demonstrate both substantive policy rationale and procedural consistency.

Listing Rule 11.07 and the “Individualisation” Requirement

Listing Rule 11.07 explicitly requires that a prospectus contain “full particulars of the emoluments, pensions, and compensation arrangements for each director.” The HKEX’s 2025 review clarified that “full particulars” means a line-by-line breakdown for each individual director, not a consolidated table. The acceptable format is a table with columns for each director (named) and rows for the following components: base salary, housing allowances, other allowances, discretionary bonuses, contractual bonuses, pension scheme contributions, share-based compensation (with valuation methodology), and any termination benefits.

For a Main Board applicant in 2025, the HKEX expects the disclosure to cover at least the three most recent completed financial years. If the issuer has only two years of audited financials under HKFRS, the prospectus must state this limitation and include a pro-forma statement for the third year based on board resolutions. Failure to do so will trigger a Section 86(1) letter, which typically suspends the listing timetable by 8-12 weeks.

SFC Code of Conduct Paragraph 5.3 and Sponsor Certification

The SFC’s 2024 amendments to Paragraph 5.3 of the Code of Conduct for Sponsors impose a new certification requirement. The sponsor must now confirm in writing to the HKEX that the director remuneration policy disclosed in the prospectus is “consistent with the issuer’s memorandum and articles of association, as amended by any board resolution passed within the 24 months preceding the listing application.” This certification must be filed as part of the sponsor’s declaration under Appendix 5 of the Listing Rules.

Practical consequence: if the issuer’s board passed a resolution in 2023 to increase the CEO’s base salary by 15%, but that resolution was not minuted as a formal amendment to the company’s remuneration policy, the sponsor cannot certify consistency. The issuer must either produce a board resolution ratifying the policy or adjust the disclosure to reflect only the policy as formally documented. In Q1 2025, the SFC issued two warning letters to sponsors for failing to verify this chain of documentation.

Structuring the Remuneration Policy Section in the Prospectus

The policy section must be a standalone chapter in the prospectus, typically placed immediately after the “Directors and Senior Management” section. It must contain three sub-sections: policy objectives and governing principles, individual remuneration breakdown, and post-listing commitments.

Policy Objectives and Governing Principles

The opening paragraph must state the issuer’s remuneration philosophy in specific, measurable terms. A generic statement such as “to attract and retain talent” is insufficient. The HKEX expects a linkage to the issuer’s business strategy and risk appetite. For example, a biotech issuer in the pre-revenue stage should disclose that 60% of CEO compensation is linked to clinical milestone achievements, with the remaining 40% as base salary. The policy must also state the maximum aggregate remuneration pool, expressed as a percentage of the issuer’s projected revenue or profit for the first three financial years post-listing.

This section must also reference the issuer’s constitutional documents. If the articles of association require shareholder approval for any director remuneration increase exceeding 10% year-on-year, that provision must be quoted verbatim. The SFC’s 2024 review found that 28% of prospectuses failed to include this cross-reference, leading to a request for a supplementary letter from the issuer’s Hong Kong legal counsel.

Individual Remuneration Breakdown with Valuation Methodology

The core of the disclosure is the individual remuneration table. For each director, the issuer must provide:

• Base salary (in HKD, with currency conversion notes if paid in RMB or USD)
• Housing and other allowances (itemised by category)
• Discretionary and contractual bonuses (with the formula for determining the bonus pool)
• Pension scheme contributions (defined contribution or defined benefit, with scheme rules)
• Share-based compensation (number of shares, grant date, vesting schedule, and valuation methodology — either Black-Scholes or Monte Carlo simulation, with all assumptions stated)
• Termination benefits (notice period, severance formula, and any non-compete payments)

The valuation of share-based compensation is a frequent flashpoint. The HKEX expects the issuer to use a valuation methodology consistent with HKFRS 2. If the issuer uses a different methodology for prospectus disclosure (e.g., intrinsic value at grant date), the prospectus must include a reconciliation to the HKFRS 2 figure. In the 2024 review, the HKEX rejected two prospectuses because the share-based compensation valuation used a 30-day average closing price instead of the grant date price as required by HKFRS 2.

Comparative Benchmarking Against Peers

The HKEX now expects, though does not formally mandate, a comparative benchmarking table. This table should show the issuer’s total director remuneration as a percentage of revenue, total assets, and market capitalisation, compared to three to five listed peers in the same GICS industry sub-group. The peers must be named, and the source of the peer data must be stated (e.g., Bloomberg, S&P Capital IQ, or the peers’ own annual reports).

If the issuer’s remuneration is above the 75th percentile of the peer group, the prospectus must include a justification. Acceptable justifications include: the issuer is in a high-growth phase requiring premium talent; the issuer operates in a jurisdiction with higher salary benchmarks (e.g., Singapore vs. China); or the issuer has a complex cross-border structure requiring additional director responsibilities. The HKEX has flagged that a justification based solely on “industry practice” without supporting data will be rejected.

Post-Listing Commitments and Shareholder Approval Mechanisms

The prospectus must also disclose the issuer’s post-listing remuneration governance framework. This section is often overlooked but is increasingly the subject of HKEX follow-up questions.

The Remuneration Committee Charter

Every Main Board issuer must establish a remuneration committee under Listing Rule 3.25. The prospectus must include the committee’s charter, either in full or as a summary. The charter must specify: the committee’s composition (majority independent non-executive directors, with an INED as chair), the frequency of meetings (at least two per year), the committee’s authority to engage external remuneration consultants, and the process for approving director remuneration changes between annual general meetings.

The HKEX’s 2024 review noted that 35% of prospectuses failed to specify the committee’s authority to engage external consultants. This omission is material because it suggests the committee lacks independence from management. The prospectus should state that the committee has the power to hire consultants “without management approval” and that the consultants’ fees are paid directly by the company.

Shareholder Approval Thresholds

The prospectus must disclose the exact shareholder approval thresholds for director remuneration changes post-listing. Under Listing Rule 13.68, any increase in the aggregate directors’ emolument cap requires a shareholders’ resolution passed by a simple majority. However, many issuers voluntarily adopt a higher threshold, such as 75% of votes cast, to align with institutional investor guidelines (e.g., ISS or Glass Lewis).

If the issuer adopts a higher threshold, the prospectus must state this clearly and explain why. Conversely, if the issuer retains the Listing Rule minimum, the prospectus should disclose that this is the minimum required by the Exchange and that the board may consider adopting a higher threshold in future. The HKEX has issued guidance that a simple majority threshold without explanation may be viewed as a governance weakness.

Clawback and Malus Provisions

In line with the SFC’s 2024 Code amendments, the prospectus must disclose whether the issuer has adopted clawback or malus provisions for director remuneration. Clawback allows the company to recover previously paid bonuses or share-based compensation if the director is found to have engaged in misconduct or if the company restates its financial statements. Malus allows the company to reduce unvested compensation before it vests.

The disclosure must state: the events triggering clawback or malus (e.g., material misstatement, fraud, breach of fiduciary duty), the time period during which clawback can be exercised (typically three to five years from payment), and whether the provisions apply to both executive and non-executive directors. In 2024, the HKEX rejected one prospectus because the clawback provision applied only to the CEO and CFO, excluding the chairman and other executive directors.

Practical Compliance Checklist for the Prospectus Drafting Process

The following checklist is derived from the HKEX’s 2025 thematic review findings and the SFC’s Sponsor Code requirements. It is intended for use by the issuer’s CFO, company secretary, and legal counsel during the prospectus drafting phase.

Pre-Filing Verification

• Confirm that each director’s remuneration for the past three financial years is documented in board minutes or a formal remuneration policy.
• Obtain a signed certification from the sponsor under Paragraph 5.3 of the SFC Code that the disclosed policy matches the issuer’s constitutional documents.
• Engage an independent valuation firm for share-based compensation if the issuer uses a methodology other than Black-Scholes or Monte Carlo.
• Prepare a comparative benchmarking table with at least three named peers and state the data source.
• Draft the remuneration committee charter with explicit language on external consultant authority.

Common Pitfalls Identified by the HKEX

• Aggregate disclosure: presenting a single total for all directors instead of individual breakdowns.
• Missing valuation assumptions: failing to state the expected volatility, risk-free rate, and expected life for share option valuations.
• Inconsistent policy language: using phrases like “may award bonuses” without stating the formula or criteria.
• Post-listing commitment gaps: omitting the clawback provision entirely or applying it only to executive directors.
• Peer group mismatch: selecting peers that are not in the same GICS sub-industry or have significantly different market capitalisations.

Timeline Impact of Non-Compliance

A Section 86(1) requisition letter from the HKEX typically requires the issuer to file a revised prospectus within 21 business days. If the deficiency is material — such as missing individual remuneration data — the HKEX may require a re-submission of the listing application, which resets the 20-business-day review clock under Listing Rule 9.11. In Q1 2025, two issuers experienced a 14-week delay due to remuneration disclosure deficiencies.

Three Actionable Takeaways for the Issuer

1. Individualise every director’s remuneration in the prospectus table, with a separate row for each component — base salary, allowances, bonuses, pensions, share-based compensation, and termination benefits — covering the three most recent financial years.
2. Obtain a sponsor certification under SFC Code Paragraph 5.3 that the disclosed policy matches the issuer’s constitutional documents, and ensure all board resolutions amending remuneration are formally minuted.
3. Include a remuneration committee charter in the prospectus that explicitly grants the committee authority to engage external consultants without management approval, and disclose clawback/malus provisions for all directors, not just executives.