Shareholders will have greater powers to influence executive pay if a government consultation designed to tackle the current gulf between performance and pay gets the green light.
The consultation, Executive pay: consultation on enhanced shareholder voting rights, launched by the Department for Business, Innovation and Skills (BIS), put forward a number of measures, including: an annual binding vote on future remuneration policy; increasing the level of support required on votes on future remuneration policy; an annual advisory vote on how pay policy was implemented in the previous year; and a binding vote on exit payments of more than one year’s salary.
Under the proposals, employers will be required to report on how they have responded to shareholder concerns and taken previous votes into account.
Vince Cable, business secretary, said: “Good corporate governance is vital to creating the right environment for long-term, sustainable growth.
“Shareholders are at the heart of the UK corporate governance framework, so it is appropriate that we put more information and power in their hands.
“I have no problem with business celebrating success and rewarding talent, but I have heard frustration from all circles that directors’ pay goes up when times are good, and yet it still goes up when performance is poor.
“I want shareholders to feel empowered to prevent rewards for mediocrity or failure.”
John Cridland, director-general of the Confederation of British Industry (CBI), rejected the push for greater shareholder power, arguing that it would simply turn shareholders into micro-managers, which would hamper business development.
Read also Vince Cable outlines measures to crack down on executive pay
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We are supportive of the government’s general direction and will advise them on how the new regulations could be most effective in their aim of curbing pay excesses.
Votes should be used to block policies where there is an evident failure to connect boardroom pay to the long-term success of the company.
Keys to the success of the binding vote will be the quality of engagement between companies and their shareholders, and a good explanation of pay policy in the annual report.
Shareholders already have similar binding powers to vote down new share plans and to vote against the re-election of directors who fail to align boardroom pay with shareholder interests.
They are making increasingly effective use of the first of these powers, and there should be times when they take a tougher approach in their use of the second.
A binding vote on future remuneration policy assumes appropriate shareholder activism within a company.
The reality is that shareholder engagement will vary hugely as large companies will have many different types of shareholders, ranging from those with a long-term to short-term perspective.
An annual vote might only serve to create a ratchet effect with pressure to see increased remuneration across the board. It still leaves open the question of how a remuneration committee will exercise its discretion under the policy.
In the event that the binding vote is lost, falling back on the previous year’s policy could well be inappropriate for the following year. The government’s expectation that shareholders could then look to exercise their vote on the re-election of directors to express their dissatisfaction seems impractical.
A binding vote on exit payments over one year’s salary would undoubtedly be a dramatic change. The result of such a vote will inevitably be that employees will look to increase a higher base salary. That may, in turn, have a multiplier effect on options and benefits when those are determined by reference to the salary.