Consultation launched on the detail of the Government’s proposals on executive pay
Following its January 2012 announcement on executive pay, the Department of Business, Innovation and Skills (BIS) has today started a formal consultation on its detailed plans “to address failings in the corporate governance framework for executive remuneration”.
The BIS press release is here and the consultation document is here. The BIS website page dedicated to the consultation is here.
Supermajority vote
The most eye-catching of the proposals, which relate to quoted companies, is not only that there should be an annual binding shareholder vote on executive pay – but that that vote would only be carried if approved by a supermajority of those voting. That supermajority should, suggests BIS, be set at a threshold of between 50% and 75%.
If the shareholder vote was lost by the company, it would have to go back to shareholders with an amended policy within 90 days (or stick with its existing policy). Existing service contracts would need to be amended to reflect the introduction of a binding vote on pay. Exit payments of more than a year’s salary would also be subject to a binding shareholder vote.
Proposals in full
The questions on which BIS is consulting are, in full:
1. The Government proposes to require an annual binding vote on remuneration policy. What are the costs and benefits of this approach?
2. In the event that a company fails the binding vote on remuneration policy, the Government proposes that it maintains its existing policy or returns to shareholders with amended proposals within 90 days. What are the costs and benefits of this approach?
3. The Government proposes that directors’ service contracts and other arrangements should, if necessary, be amended to take account of the new requirement to seek shareholder approval of remuneration policy. What are the costs and benefits of this approach?
4. The Government proposes that remuneration packages offered to in-year recruits should be confined by the limits and structures set out in the agreed remuneration policy. What are the costs and benefits of this approach?
5. The Government proposes that the report on future remuneration policy should provide more details on how approved LTIPs will operate for directors in that particular year. Do you agree with this approach?
6. The Government proposes to increase the level of shareholder support that should be required to pass the vote on future remuneration policy. Do you agree with this approach and if so, what would be an appropriate threshold?
7. The Government proposes to require companies to explain how the results of the advisory vote have been taken into account the following year and to issue a statement to the market sooner than this where there is a significant level of shareholder dissent. What are the costs and benefits of this approach?
8. The Government proposes to give shareholder a binding vote on exit payments of more than one year’s base salary. Do you agree with this approach or would an alternative threshold for requiring a shareholder vote be more appropriate?
9. The Government recognises that the circumstances under which a director leaves their post are complex and diverse and so invites feedback on the appropriate scope and breadth of the proposed legislative measures.
10. The Government proposes that directors’ service contracts and other arrangements should be amended to take account of the new requirement to seek shareholder approval for exit payments over one year’s base salary. What are the costs and benefits of this approach?
11. The Government notes that a small number of directors could be entitled to generous pension enhancements if their contract is terminated early. It proposes not to legislate to override these rights, owing to the rarity of such arrangements and the complexity of legislation that would be required. Do you agree with this approach?
12. The Government proposes to leave unchanged the existing requirement in company law (section 188 of the Companies Act) to get members’ approval for notice periods of more than two years. Do you agree with this approach?
The consultation closes on 27 April 2012.
UPDATE 30 April 2012: The (mostly negative) response of the GC100 group, representing FTSE100 general counsel and company secretaries, to this consultation is here.
UPDATE 9 May 2012: The expectation is that the binding vote on quoted company executive pay, confirmed today in the Queen’s Speech, will require an ordinary resolution to pass, rather than the higher threshold of a supermajority. See this post for details.
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