- Pay and pay offs may be subject to shareholder vote; consultation to determine scope and type of vote
- Serving executives to be limited from other companies’ remuneration committees
- UK Corporate Governance Code to be amended to allow clawback of pay
- Remuneration reports to be split into “past pay” and “future pay” sections
The Business Secretary today set out in Parliament (ahead of a formal launch tomorrow) the Government’s plans for more transparency in, and greater shareholder control over, executive pay at listed companies. The principal measures announced in the Business Secretary’s speech are set out below.
UPDATE 25 January 2012: The Department for Business, Innovation and Skills has now published information about the Government’s proposals on its website.
To which companies do these proposals will apply? The speech is not entirely explicit, but the references to “remuneration reports” and to the UK Corporate Governance Code indicate that the proposals are aimed at companies on the Official List (and which must “comply or explain” with the UK Corporate Governance Code) – i.e. quoted companies – and so will not apply to AIM companies.
Increased transparency: Quoted companies will have to -
- “provide a single figure for total pay for each director”;
- publish remuneration reports in two sections: one setting out how pay policy has been implemented in the preceding year, and another setting out the proposed future policy for executive pay;
- explain how the pay awards “relate to the performance of the company”;
- produce a “distribution statement”, explaining how executive pay compares with “other dispersals such as dividends, business investment, taxation and general staffing costs”; and
- explain how they have taken employee earnings, including pay differentials, into account when setting executive pay and how they have “consulted employees and taken their views into account”.
Quoted companies will not be obliged to put workers on remuneration committees, and nor will they have to publish a standardised pay ratio.
Shareholder control: Consultation on nature of binding vote on executive pay
The Business Secretary’s speech is clear that there will be some form of binding shareholder vote on executive pay, but he is putting the exact nature of that vote out to consultation:
“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.”
The Government will ask the Financial Reporting Council to revise the UK Corporate Governance Code “in order to require all large public companies to adopt clawbacks” of pay.
- the Government will “require greater transparency around the role of remuneration consultants, how they are appointed, their fees, and who they advise and report to”;
- the Government will “look at” mechanisms to limit serving executive directors sitting on the remuneration committees of other companies;
- ministers will continue to encourage firms to increase diversity at board level voluntarily, with the Business Secretary stating that he would like “at least two board members to have never previously been members of a board of directors”; and
- the chair of the High Pay Commission will head a new project monitoring top-end pay.
We reported on the High Pay Commission’s November 2011 report on “excessive top pay” in this post. The Business Secretary today said that he is introducing ten of the 12 measures in the High Pay Commission report “in practice or in spirit”.
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