Government proposals on executive remuneration

8th March 2012

This news item looks at the Government’s proposals on executive remuneration in UK listed companies, which are intended to address public concern about excessive levels of pay for some senior executives. 

Vince Cable, the Secretary of State for Business, Innovation and Skills, has responded to the recent consultation on executive remuneration. In doing so, he has tried to balance the desire of politicians to react to widespread public discontent on the subject without prejudicing entrepreneurial activity and economic growth. This approach sits alongside the Government’s expressed desire to encourage wider employee ownership. The main proposals are as follows:

  • In an effort to provide greater transparency, listed companies will be required to provide more information on the benchmarks used to set pay, a single figure for total pay and a comparison between pay and other distributions such as dividends and staff costs generally. Remuneration reports will be in two sections, one describing proposed future policy and the other reporting on how pay policy has been implemented in the previous year.
  • Shareholders will have greater influence through binding, rather than advisory, votes on pay policies, including exit payments greater than a year’s salary. There will be consultation on the detail of these voting requirements because the Government is conscious of complications arising from votes conflicting with existing contractual commitments. The Government also intends to invite the Financial Reporting Council to consult on amending the UK Corporate Governance Code to require all large public companies to adopt clawback provisions which operate where a company performs poorly. It is hoped that this consultation will include a review of the current lack of clarity regarding the possible recovery of tax already paid on sums which are subject to clawback.
  • Companies are to be urged to appoint directors from more diverse backgrounds. This ties in with efforts elsewhere to encourage companies to appoint more female directors. Dr Cable would like each board to include at least two individuals who have not been directors before. It is also proposed that no executive director of a FTSE 350 company should serve on the board of another FTSE 350 company. Since there are very few cross-directorships at present, this will have limited impact.

The business community generally has given a cautious welcome to the proposals. In part, this reflects relief that the proposals avoid some of the more contentious suggestions made in the course of the consultation, such as the appointment of employee representatives to boards of directors.

For companies outside the FTSE 350, these proposals have no direct application, but they do indicate the direction of current Government thinking. Smaller companies can take comfort that, in general, the Government has resisted the temptation to introduce more prescriptive legislation in this area and has instead chosen to encourage greater involvement on the part of shareholders to act as a restraining influence on escalating executive pay.