Business secretary Vince Cable has outlined a raft of measures around executive pay, including proposals to increase the power of shareholders and demystify complex pay deals.
Cable said that shareholders should get a legally binding vote on boardroom pay policies (including how performance in measured), exit payments worth more than one year’s salary and clawback clauses.
Members of the business community, however, believe that such binding votes need to be handled carefully. Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: “A vote must not impede the effective management of businesses, or the constructive dialogue between shareholders and boards.”
Sean O’Hare, remuneration partner at PricewaterhouseCoopers (PWC), said: “The most significant change is the binding vote for shareholders on future pay. This will force much greater engagement between organisations and shareholders, as no one will want the figures subject to vote to come as a surprise. It is true shareholders will be loathe to use the binding vote but for this reason they will want to be involved beforehand in the decision.”
Cable wants to see the corporate governance code revised to include a bonus clawback mechanism of executive bonuses. It was suggested that there should be more information on what benchmarks companies use to set pay and a single figure for total pay should be produced.
John Cridland, director general of the Confederation of British Industry (CBI), said: “We have been clear that executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance. Millions for mediocrity does a disservice to the reputations of hard working businesses.
“Introducing a single remuneration figure is a positive step forward and will help achieve greater transparency.”
Calls were also made for organisations to diversify the board and for two places on each board to be reserved for people who have not been a director. Cable also wants current executive directors to be barred from other companies’ remuneration committees.
The government will also pressurise companies to explain how they have consulted with employees when they set boardroom pay.
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There has been a great deal of commentary about Vince Cable’s proposals to deal with the thorny issue of excessive executive pay, not much of it complimentary!
Given that many of the issues that lie at the heart of the executive pay dispute are cultural or institutional issues, it is not a matter that is going to be resolved to everyone’s satisfaction overnight. The matter is inherently political and there is a high level of public resentment, understandably, at employees of nationally-owned banks receiving excessive remuneration.
People seem somewhat less exercised over successful private companies, providing high levels of employment and business opportunity for the UK, paying their top executives top dollar for the jobs they do.
We welcome the proposals on executive remuneration announced by the business secretary on Monday, and support the need to make remuneration reporting clearer and more informative.
Reporting on future remuneration policy separately from the disclosure of how policy has been implemented in the current reporting period will, in our view, be very helpful to shareholders in determining the appropriateness of the arrangements. We also welcome the principle of a binding vote as a targeted response to concerns around payments for failure.
We support the requirement for remuneration committees to disclose how they have taken the views of employees into account when setting executive pay. We believe this is an important way of ensuring the remuneration of executive directors is properly considered within the context of the company as whole.
We are also pleased to see that the government has not included a requirement to disclose ratios. While these can be a useful internal mechanism for monitoring pay over time, they would be very misleading if used to compare one company with another.
While the government will legislate to give company shareholders a binding vote over executive compensation, it could prove cumbersome. In particular, if the package is rejected and has to be renegotiated, it could even lead to deadlock. Existing contracts will need to be changed to reflect this new requirement, unless legislation is introduced to trump existing terms.
While certain companies’ remuneration reports can be complex, it remains to be seen whether improved clarification and explanation would encourage greater shareholder activism in the setting of executive pay levels. It may invite some to adopt more simplified pay structures which could reopen the debate of how aligned these are with shareholder interests by virtue of their design. It could also mean, in that case, renegotiating terms.
A key aspect of Vince Cable’s announcement today is that the corporate governance code is to be revised to include a bonus clawback mechanism of executive bonuses. In reality, it is difficult to see these as applying except in the most extreme circumstances, since it means taking back pay. In practice, actual recovery is bound to lead to disputes as to whether the clawback has been triggered and difficulties in achieving recovery of the sums paid over.