Government consults on executive pay and corporate governance

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The government has launched a consultation into proposed measures to strengthen corporate governance in the UK, including executive pay reforms.

The Corporate governance reform green paper, which was published on Tuesday 29 November 2016, sets out potential measures to address concerns around executive pay and transparency; how to strengthen stakeholder voices, including that of employees, in the boardroom; options for improving corporate governance frameworks for large, privately-owned organisations.

The potential measures outlined around executive pay aim to strengthen shareholder voting rights, encourage greater shareholder engagement with executive pay, strengthen the role of remuneration committees, improve executive pay transparency, and the effectiveness of long-term pay incentives.

The consultation seeks views on the options for reform outlined in the green paper.  These include requiring organisations to report pay ratios between the chief executive officer and wider workforce. It also proposes better alignment of long-term incentive plans with long-term business interests through the use of restricted share awards instead of long-term incentive plans or by extending the holding period for share options to a minimum of five years for executives.

The consultation will remain open to responses until 17 February 2017.

Greg Clark, business secretary, said: “The government is determined to make Britain one of the best places in the world to work, to invest and to do business, and part of that means continuing to have a framework of corporate governance that is admired across the world. This review will help us achieve that aim and the views of businesses, investors, employees, consumers and others with an interest in successful business are warmly welcomed.”

Charles Cotton, pay and reward adviser at the Chartered Institute of Personnel and Development (CIPD), said: “The publication of pay ratios is a welcome first step in addressing the broken system of executive pay. Alongside the presence of employees on remuneration committees, they will help build greater transparency over executive salaries and bonuses, and should encourage organisations to ensure there is a clearer link between overall top pay levels, organisational performance and the rewards of the wider workforce.”

Rupal Patel, people advisory services partner at EY, added: “We welcome the opportunity for business to consult with the government on requiring [organisations] to publish pay ratios that show the difference in earnings between the chief executive and an average employee. The consultation paper rightly points out that this would need to be introduced carefully so as to be meaningful, rather than just another reporting obligation. The detail surrounding the figure and any unforeseen consequences of its publication need to be carefully considered as there is a risk that using a single statistic may drive the wrong behaviours in [organisations].”