Government Proposals On Executive Pay

Kevin Cunningham Explores the Government's Plans For Executive Pay

20.03.2012

Vince Cable has recently outlined how the Government plans to improve the alignment of executive pay and long-term company performance and address the issue of pay inequality in larger companies operating in the private sector. In this article, Kevin Cunningham, Head of Corporate, explores what it means.

Clearer information for shareholders

  • Remuneration reports (which form part of a quoted company’s annual report and accounts) will be split into two parts. The first part looking backwards (how pay policy has been implemented during the previous year) and the second part looking forwards (future pay policy).
  • In these reports, quoted companies will have to explain why specific performance targets have been used and how they have taken employee earnings (including pay differentials) into account. They will also have to explain how they have consulted employees and taken their views into account. New requirements for disclosures in relation to employee consultation may lead to employees in large companies making greater use of their existing (but to date somewhat underutilised) rights under the Information and Consultation of Employees Regulations 2004 to be consulted on pay and other issues. 
  • In the backwards looking part of the report, quoted companies will also have to provide a single “all in” total pay figure for each director.

Enhanced shareholder controls in relation to remuneration reports

  • Proposals being considered will be subject to further consultation but include giving shareholders a binding vote on matters including future pay policy (including real numbers on potential pay outs to directors), any director’s notice period which exceeds one year and any exit payment which is more than one year’s salary.
  • The Government is also considering increasing the approval threshold for pay proposals to 75% of votes cast (from the current 50%). This is likely to be a concern for the handful of FTSE 100 companies which did not meet that higher threshold last year.

Greater diversity in Boards and remuneration committees

  • Limits may be imposed on the number of directors appointed who are executives of other companies.
  • New measures will be introduced to encourage the appointment of directors from different backgrounds including the professions, public servants and academics. Mr Cable stated that he would like at least two board members to have never previously been members of any board of directors.
  • Changes are also expected to ensure greater transparency on the appointment, role and fees of remuneration consultants.

The Financial Reporting Council will also be asked to address the ‘payment for failure’ issue by changing the UK Corporate Governance Code to require, in future, all quoted companies to adopt clawback mechanisms.

Following his announcement Mr Cable has been criticised for not fully addressing all of the recommendations made by the independent High Pay Commission. The most noteworthy omissions being recommendations that listed companies be required to have employees represented on their remuneration committee (which the Commission found to be “a closed shop largely made up of current or recently retired executives”) and that pay ratios be disclosed in remuneration reports highlighting the pay gap between a company’s highest earners and their average employee.
 
It remains to be seen whether the proposed reforms will strike the right balance by curbing excessive pay while not preventing reward where it is due at a time when we expect economic recovery to be led by private enterprise.

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