Business secretary Vince Cable has announced comprehensive reforms for company directors’ remuneration, including a binding vote for shareholders on pay policy and exit payments.
Cable’s package of measures aims to address corporate governance failures by empowering shareholders to engage effectively about decisions on pay.
The reforms will be introduced under the Enterprise and Regulatory Reform Bill, which is currently before Parliament. The government intends for the reforms to be enacted by October 2013.
The measures include:
- A binding vote on pay policy, requiring the support of a majority of shareholders voting to pass. The policy should clearly set out how pay supports the strategic objectives of the company and include better information on how directors’ pay compares to the wider workforce.
- The binding vote will be held annually unless companies choose to leave their remuneration policy unchanged, in which case it will be compulsory at least every three years. For the first time, once a policy is approved, companies will not be able to make payments outside its scope.
- If a company chooses to change its pay policy, it will have to put it before shareholders for re-approval. This will encourage companies to devise long-term policies and put a brake on annual pay ratcheting.
- As part of their pay policy, companies will have to clearly explain their approach to exit payments, which will also be subject to the binding vote. When a director leaves, the company will have to promptly publish a statement of payments the director has received.
- Companies will not be able to pay exiting directors more than shareholders have agreed. Alongside the binding vote on policy, shareholders will continue to have an annual advisory vote on how pay policy was implemented in the previous year, including actual sums paid to directors. If a company fails the advisory vote, it will be required to put its overall pay policy back to shareholders in a binding vote the following year.
In addition, the Financial Reporting Council will consult on updating the Corporate Governance Code so that companies should make a statement when a significant minority of shareholders vote against a pay resolution.
Companies will have to report a single figure for the total pay their directors received for the year. This figure will cover all rewards received by directors, including bonuses and long-term incentives. Companies will also have to report details of whether they met performance measures and a comparison between company performance and chief executives’ pay.
Cable said: “At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10% a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.
“In January we kicked off a national debate aimed at encouraging shareholders to become more actively engaged as company owners in better aligning directors’ pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained. That is why I am bringing forward legislation to strengthen the powers of shareholders through a binding vote on pay.”
Christopher Johnson, UK head of Mercer’s human capital business, said: “By making the binding vote on the remuneration policy effective for three years, some of the difficulties we foresaw will be mitigated – in particular returning to shareholders with amended proposals in the event of a negative vote.
“Current levels and approaches to executive pay reflect a market failure. We understand the government’s focus on investor responsibilities but we believe that board effectiveness is equally important and would like to see the government and companies put a greater focus on this area.”
“We are concerned that the new requirements may restrict companies’ ability to adapt their reward offerings to reflect changing business environments and markets for talent. However, a triennial binding vote should encourage companies to adopt a longer term and transparent approach to their executives’ pay.”
For more articles on executive pay