Executive pay: Government consults on empowering shareholders

Executive pay: Government consults on empowering shareholders

Published:

Author: Gareth Davies

In this time of austerity, executive remuneration continues to attract the attention of the media, business leaders, investors and academics

In January 2012, following the government's autumn 2011 discussion paper, the Secretary of State for Business Innovation and Skills announced a package of measures to tackle the issue of rising executive pay which is not necessarily linked to performance.

The measures included greater transparency in remuneration reports, shareholder empowerment, employee engagement, more diversity in the boardroom and working with investors and business to promote best practice.

In March 2012, the government's proposals in relation to shareholder empowerment were outlined in a consultation paper entitled 'Executive pay: Shareholder voting rights consultation'.

The government proposes, in relation to all quoted companies:

  • An annual binding vote on remuneration - shareholders would be given a binding vote on the company's remuneration policy. Companies would be required to set out a proposed remuneration policy for the year ahead, giving shareholders the right to approve variable remuneration including salary increases and criteria for performance related pay. The company would then be required to act within the scope of that policy
  • Increasing the level of support on future remuneration policy - to encourage companies to improve their engagement with shareholders on the issue of pay, the government proposes that companies will need to secure a higher level of shareholder support, beyond the current majority threshold, in relation to future remuneration policies and invites comment on what the appropriate threshold should be
  • A binding vote on exit payments - in an effort to mitigate against payment for failure amendments to the existing law on payments for loss of office are proposed. Shareholders would be given a binding vote on any exit payment to a director which exceeds the equivalent of one year's base salary. This will apply where a director's service contract has been terminated early and without due notice and companies will be expected to amend existing contracts to accommodate the new legislation (i.e. to acknowledge that any such exit payments are subject to shareholder approval)
  • An annual advisory vote on the implementation of remuneration policy - shareholders would have an advisory vote on how the remuneration policy approved in the previous year has been implemented. Companies would be required to quantify and justify all awards made to directors. Failure to secure 75% support of the votes cast would require the company to issue a statement to the market detailing the issues that shareholders have raised and how the company proposes to work with shareholders to address them

The government is inviting written responses to the consultation, which closes on 27 April 2012. It will then confirm the precise measures it expects to take forward in primary legislation later this year, with new legislation expected to come into force in 2013.

Comment

Increased voting rights will enable shareholders to approve the remuneration framework and should promote better quality engagement between the company and shareholders. There is some concern that, with emerging overseas markets, excessively strict controls on the levels of pay and bonuses could lead to the loss of talented individuals to other jurisdictions.

However, there is clearly a balance to be struck between the need to address the absence of a link between pay and performance and the need to offer competitive remuneration packages to recruit and retain high quality executives in the UK boardroom.

Further information on the consultation can be found at: http://www.bis.gov.uk/Consultations/executive-pay-shareholder-voting-rights.