U.K. to give shareholders power over executive pay

Vote limited to once every 3 years if no changes to pay
By Tim Castle
|hrreporter.com|Last Updated: 06/21/2012

LONDON (Reuters) — Britain will legislate to give shareholders the power to reject company director pay deals in a bid to tie the link to performance and calm public anger over soaring executive earnings, Business Secretary Vince Cable said on Wednesday.

The move puts Britain in the vanguard of a clampdown on corporate pay that has seen investors voicing their disapproval at FTSE 100 boardroom levels which have quadrupled over the past decade, far exceeding the performance of share values.

The plans will strengthen the hand of shareholders who currently only have an advisory and non-binding vote on directors' remuneration.

"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," Cable said.

The move follows measures to limit the level of banker's bonuses following the financial crisis and comes as the European Union considers similar proposals to boost shareholder control over director pay.

Pay increases for top executives in the United States have also slowed in response to shareholder pressure, although they still gained by 14 per cent in 2011.

Industry groups cautioned against further restrictions on top earnings and stressed that pay levels should be a matter for companies, not government.

"High pay for success is perfectly acceptable, it is high pay for failure that needs to be addressed," said Mark Boleat, policy chairman at the City of London, which promotes the capital's financial sector.

Cable said companies listed publicly in Britain would have to seek the approval of shareholders to award compensation packages to directors in an annual vote, under laws that could come into force as early as 2013.

Companies will be able to limit the shareholders' vote on pay to once every three years, provided they make no change in compensation arrangements for directors.

The investment community broadly welcomed Wednesday's announcement, with the Association of British Insurers saying the plans were "practical, workable and should help tackle excessive executive pay".

The government has said for some months it planned to boost shareholder's sway over compensation, but had held back publication while it consulted with industry and investors over the measures.

The new binding vote will also cover the level of potential exit payments — frequently criticised as "rewards for failure" — and shareholders will in addition have a second, non-binding, vote in judgement on the levels of past remuneration.

If a company fails the advisory vote on past pay, it will have to resubmit its overall compensation policy to shareholders in their binding vote the following year.

Companies will also have to publish a single figure of remuneration for each director, so that investors do not have to search annual reports to calculate total rewards, and publish a chart comparing chief executive pay and company performance.

However, Cable dropped plans requiring companies to win a majority beyond 50 per cent — perhaps as high as 75 per cent — to get their future remuneration plans accepted, saying it had proved legally complicated and could give minority shareholders disproportionate influence.

The Confederation of British Industry backed the change, saying that otherwise boardrooms would have been "at the mercy of activist minorities."

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