Reforms to allow shareholders a say on executive pay

Reforms affecting the way top executives are paid are to be brought forward, the Government has announced.

Business secretary, Vince Cable is to pass power to company shareholders allowing them binding votes on executive pay, remuneration packages and exit payments to ensure transparency between payments and performance.

It is hoped that the new measures will bring an end to 'failures in corporate governance' and growing annoyance towards some of Britain's highest earning companies and executives.

Vince Cable said: "At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors' pay rising at 10 per cent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen."

The move follows a consultation on shareholder voting rights earlier in the year and a discussion paper last year. Cable said that he had been encouraged by the 'shareholder spring', which has recently seen shareholders revolt against executive pay at large corporations.

The reforms will provide shareholders with the authority to hold companies to account for company performance, make it easier to understand how much directors are earning and how it is related to overall performance. The measures include:

  • A binding vote on pay policy: The majority vote passed by shareholders will determine the salary of executives. The pay policy must clearly set out how the salary relates to the company as a whole, and how it compares to that of the wider workforce. Additional payments cannot be made outside the policy.
  • Annual binding votes: Votes are to be held once a year if companies wish to make amendments to the policy. Otherwise, votes for unchanged policies must be held every three years.
  • Forming clear guidelines on exit payment: Also subject to binding votes.
  • Annual advisory vote: A review of the pay policy from the previous year.
  • The reporting of a single figure for total pay of directors: To include rewards, bonuses, incentives, and whether or not they met performance measures.

Simon Walkers of the Institute of Directors (IOD) welcomed the proposals, saying: "These measures will help to rein in the trend in some large firms for rewards that simply aren't justified by performance - and in so doing, they will help to strengthen the reputation and practice of business."

The reforms are being made to the Enterprise and Regulatory Reform Bill which is currently before Parliament, and are expected to be implemented by October 2013.