Following up on the package of measures Vince Cable announced earlier this year (see our January 2012 update), in its latest consultation on executive pay published in March 2012 the Department for Business, Innovation and Skills (BIS) is making the following proposals, among others:
Enhanced shareholder rights.
Remuneration report. Rather than giving shareholders the option of a binding vote on all remuneration issues, BIS are proposing to amend the existing reporting regulations and to split the directors’ remuneration report into two sections:
- One section would outline the proposed future remuneration policy and potential payouts. The Government is proposing making this section subject to an annual binding shareholder vote; for this shareholder vote to pass, the Government is considering requiring a higher than 50% but lower than 75% majority of the votes cast.
- The other section of the remuneration report would explain how remuneration policy was implemented in the previous financial year, including actual payouts made. This section is proposed to remain subject to an advisory shareholder vote only.
- Remuneration report. Rather than giving shareholders the option of a binding vote on all remuneration issues, BIS are proposing to amend the existing reporting regulations and to split the directors’ remuneration report into two sections:
Shareholders would be able to vote separately on each section.
- Exit payments. To address cases of 'payment for failure', BIS is further proposing a binding (ordinary) shareholder vote on any exit payment to a director which exceeds the equivalent of one year's base salary. This is proposed to come into effect on 1 October 2013. After that date, any provisions in directors' service contracts and other arrangements providing for an entitlement to exit payments beyond one year's base salary would be void. This is proposed to apply to both existing and new contracts. Companies would therefore need to amend existing contracts before 1 October 2013.
- More transparency. Despite previously voiced criticism by the business community in relation to the Government's discussion paper on executive pay, BIS are proposing to go ahead with their requirement for the backward-looking section of the remuneration report to include, among others, a single figure for the total pay of each individual director.
The deadline for this consultation is 27 April 2012 and the Government is expected to publish its final proposals for enhanced shareholder voting rights early this summer.
The proposed changes, if adopted, will radically change the way companies engage with their shareholders when setting executive pay. For shareholders this is a welcome change as they will have much greater say on the matter. It will be interesting to see how companies deal with the proposed enhanced shareholder voting rights in practice, especially in relation to the remuneration packages they can offer when recruiting directors in-year and in relation to exit payments.