Executive pay reform

The government is to press ahead with reforms to executive pay. Announcing the new package of reforms Vince Cable said: ‘We cannot accept directors’ pay rising five times greater than average workers’ pay as happened last year ... there is evidence of a clear market failure’.

The original consultation paper, published in October 2011, included a wide range of proposals such as appointing employee representatives to remuneration committees, but these have been rejected. The key measure proposed is giving shareholders a binding vote on executive pay, notice periods and exit packages in place of the current power of holding an advisory vote. A second strand is greater transparency, requiring the publication of all directors’ salaries, while all companies will need to introduce ‘clawback’ policies, allowing them to recoup bonuses in cases where they are later shown to be unwarranted.

These and other related proposals can be grouped under some general headings:

• Greater transparency - legislation is promised later this year to require companies to give more details on relative performance of a company, pay differentials within a group and improving employee involvement in monitoring pay (possibly as part of the Information and Consultation Regulations which already give employees rights to information on key business decisions), a single figure on overall remuneration and setting out how much is paid out in executive remuneration compared with dividends etc.
• Binding votes - the government is going to consult on how to extend shareholder power by requiring binding votes on forward-looking remuneration and termination payments in excess of 1 times salary. It is also thinking about what level of shareholder approval should be necessary for votes on remuneration - should it be 75% rather than the existing 50%, for example?
• Diversity - aside from moves for greater gender diversity on boards, consideration about whether to ensure fresh views by (for example) reserving places on boards for those who have never been a member of a board before (e.g. academics or public servants) and excluding a director who is an executive director at another company.
• Clawback - all listed companies will have to have some form of clawback of pay in the event of severe under-performance

See outline of the reforms on the BIS website and a speech by Vince Cable to Social Market Foundation expanding on the reforms.