EXECUTIVE PAY
Government unveils new executive pay curbs
Business secretary Vince Cable has announced plans to give shareholders a binding vote on executive pay deals. Cable told MPs that consultation on the issue had made it clear there was "a disconnect between top pay and company performance and that something must be done".
Here’s a summary below of the measures announced by Cable to parliament on 23 January 2012.
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More informative remuneration reports . . .
“At present many company pay reports are simply impenetrable. Through secondary legislation later this year the government will require companies to publish more informative remuneration reports on how executives are rewarded. This will start with reports being split into two sections: one detailing proposed future policy for executive pay, and the other setting out how pay policy has been implemented in the previous year.”
Take into account earnings of other employees . . .
"Remuneration committees will be expected to explain why they have used specific benchmarks and how they have taken into account employee earnings, including pay differentials, when setting pay."
Consultation with employees . . .
“Companies will also have to explain how they have consulted employees and taken their views into account. UK employees in large companies already have the right to request that their employers consult them on issues relating to the organisation, including pay, through the Information and Consultation of Employees Regulations 2004. This potentially powerful mechanism for employees has been underutilised to date, so I encourage employees to use it and put executive pay on the agenda.”
Publication of a single “total pay” figure . . .
“Companies will have to provide a single figure for total pay for each director and explain how pay awards relate to the company’s performance.”
Publication of a “distribution statement” (but no standardised pay ratio) . . .
“To provide context, companies will be mandated to produce a distribution statement outlining how executive pay compares with other dispersals, such as dividends, business investment, taxation and general staffing costs.”
Consultation on binding votes on executive pay, notice periods and exit packages . . .
“I will consult shortly on specific proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards. This will include a binding vote on future pay policy, including details of how performance will be judged and real numbers on the potential payouts directors could receive. Companies will have to include a statement on how they have taken into account shareholder views and the results of previous votes.
“There will also be a binding vote on any director’s notice period longer than one year and on exit payments of more than one year’s salary. Shareholders will still get a vote on how the agreed policy has been implemented. I will consider whether we need further sanctions that could be applied when a significant number of shareholders dissented in the advisory vote. In addition, we will review what level of shareholder support is needed to pass pay proposals - for example, whether the threshold for a successful vote should be raised to 75% of share votes cast. By way of context, last year four FTSE 100 companies failed that test.”
Role of consultants . . .
“The government will also address fundamental conflicts of interest in the pay-setting process and require greater transparency on the role of remuneration consultants, how they are appointed, their fees, and who they advise and report to.”
Conflicts of interests among Remco members (but no workers on Remco) . . .
“We have also observed that in the FTSE 350 about 6% of remuneration committee members are executives of other companies. There is a perceived conflict, as those individuals have a personal interest in maintaining the status quo in pay-setting culture and in pay levels, and we are looking at mechanisms to limit that.”
Payments for failure – the use of clawbacks . . .
“Some of our consultees have argued that all quoted companies, not just those in financial services, should have a clawback mechanism in place, and we will ask the Financial Reporting Council to revise the corporate governance code in order to require all large public companies to adopt clawbacks.”
New "high pay centre" launched . . .
“Deborah Hargreaves, who chairs the High Pay Commission, will launch a new project next week to monitor the state of pay at the top. The high pay centre will perform an important role in delivering the high-quality research that this area of debate badly needs.”
A final word
“We cannot continue to see chief executives’ pay rising at 13% a year while the performance of companies on the stock exchange languishes well behind, and we cannot accept top pay rising at five times the rate of average workers’ pay, as it did last year. It is not government’s role to micro-manage company pay, but there are things we can do to address what is a clear market failure.” - Vince Cable, Secretary of State for Business, Innovation and Skills.
Want to know more?
Read the House of Commons Hansard Debate, 23 January 2012: click here.
The BBC news report is online at www.bbc.co.uk/news/uk-politics-16688925.
--> Executive Remuneration Discussion Paper: Summary of responses
Published by: Department for Business, Innovation and Skills.
Publication date: 23 January 2012.
Summary of responses to the discussion paper on executive remuneration (URN 11/1287). Summarises by theme and by question. The discussion paper looked at how remuneration is structured and the role of remuneration committees and shareholders in the process of setting pay.
Available for download at www.bis.gov.uk/Consultations/category/closedwithresponse.