Executive remuneration - a move in the right direction

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This afternoon the Business Secretary, Vince Cable, announced the Government’s proposals on executive pay. Whilst some may argue that the Government has failed to meet its promises in giving shareholders greater influence on executive remuneration, the Government’s view is that it is not for them to “micromanage companies” and that the proposals give companies “the flexibility to design and implement pay policies that suit their organisation”.

Key proposals include:

  • There will be a binding vote on future remuneration policy requiring support from a simple majority of shareholders (50% plus one, as opposed to up to 75%, which was originally proposed).  The vote can take place annually but, at a minimum, must take place every three years.  If directors wish to change the policy, shareholder approval will be required.
  • The future pay policy report will need to include (i) scenarios for what directors will get paid for performance that is above, on and below target and (ii) the principles on which exit payments will be made, including how they will be calculated, whether the company will distinguish between types of leaver or the circumstances of exit and how performance will be taken into account.  Contrary to original proposals, there will be no separate binding vote on any exit package which exceeds the equivalent of one year’s base salary.
  • If the binding vote fails, the company has the choice of either ‘falling back’ on the last approved policy until the next AGM or convening a general meeting to put forward a revised policy.
  • Shareholders will continue to have a vote on the implementation of previous remuneration policy. The vote is advisory only requiring a simple majority.  The implementation report will need to include a single total figure of remuneration for each director.  This will be comprehensive and include all types of reward received by directors in the previous year including fixed and variable elements as well as pension provision. For variable elements, the single figure will reflect actual pay earned, rather than potential pay awarded.  If this vote fails, the company will have to put the policy back to shareholders for re-approval in a binding vote the following year.

The FRC has also announced proposals to consult on amendments to the UK Corporate Governance Code to extend claw back arrangements and to limit the practice of executive directors sitting on other remuneration committees.  It will also seek views on whether companies should publish a statement on how they will address shareholder concerns if they fail to pass the vote on remuneration policies (future and implemented).  However, any such consultation will take place after the legislation on executive remuneration has been finalised.

Shortly the Government will bring forward amendments to the Enterprise and Regulatory Reform Bill to introduce these reforms.

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