Business Secretary Vince Cable has today announced the Government's plans in relation to its executive remuneration reform proposals, including its proposals to increase shareholder voting rights. In this e-bulletin we outline the Government's proposals. A more detailed briefing will follow in due course.
The measures announced by Vince Cable include:
- Increased shareholder power through the introduction of a binding vote
- A new binding shareholder vote on remuneration policy (including key elements of pay, the performance measures that will be used and the principles on which exit payments will be made), requiring the support of a simple majority of shareholders voting (and not 75% as had previously been suggested). The policy will need to show how pay promotes the strategic objectives of the company and include a comparison between directors' pay and that of the wider workforce.
- The binding vote will be held annually unless a company chooses to leave its remuneration policy unchanged, in which case it will be compulsory at least once every three years. If the binding vote is not passed, the company will have to continue to use its existing remuneration policy until shareholders agree a revised policy. This could be either by convening an EGM or by waiting until the next AGM, but in any event may be no later than the third anniversary of the last successful binding vote.
- Once a remuneration policy is approved, the company will not be able to make payments outside the scope of that policy without further shareholder approval. If a company chooses to change the remuneration policy, shareholder re-approval is required. The stated aim is to encourage companies to devise long-term policies and avoid upward annual pay ratcheting.
- Companies will have to explain clearly their approach to exit payments. When a director leaves, the company will have to disclose promptly details of any payments that the director has received, and will not be able to pay more than shareholders have previously agreed. This is a major change to the original proposal which would have required shareholder approval for exit payments of more than one year's base salary.
- The annual advisory shareholder vote on the implementation of the remuneration policy over the previous year, including actual sums paid to directors, will be retained. If the advisory vote is not passed, which will continue to require the support of a majority of shareholders voting, the company will be required to put its overall remuneration policy back to shareholders for re-approval in a binding vote the following year.
- Improving transparency
- The Government announced that revised, simplified regulations setting out how companies must report directors' pay will be introduced to make remuneration reports clearer and more transparent for investors.
- The Government will introduce a requirement to disclose a single total pay figure for each director. This is a major change. This figure will cover all rewards received by directors, including bonuses and long-term incentives. For variable elements of pay, it is proposed that the single figure will reflect actual pay earned rather than potential pay awarded. Companies will also have to report on whether they have met performance measures and include a comparison between company performance and the chief executive's total remuneration.
The Government aims to have the changes enacted by October 2013. To introduce these reforms, the Government will table amendments to the Enterprise and Regulatory Reform Bill which is currently before Parliament and introduce new regulations setting out what companies must report on directors' pay.
The Financial Reporting Council has announced that it will consult on whether to amend the UK Corporate Governance Code in relation to executive remuneration (including a requirement that companies should make a statement when a significant majority of shareholders vote against a pay resolution).
The Government has scaled back some of the more controversial aspects of its reform proposals (such as the proposal to make the binding vote on future remuneration policy subject to a 75% majority vote and the proposal to introduce a binding vote on directors' exit payments of more than one year's base salary). However, these are nevertheless far-reaching reforms which aim to address the disconnect between levels of pay for directors and the performance of their companies.
It seems that the Government, having consulted widely, has walked the tight-rope between, on the one hand, the view that shareholders should be able to micro-manage the terms of remuneration for senior executives and, on the other, that too much shareholder interference in this area is inappropriate.