VINCE Cable’s plans to reform boardroom pay received a cautious backing from the City, although it was thought unlikely that the business secretary’s proposals would have a meaningful impact on actual pay levels.
John Cridland, director-general of the CBI, said “executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance” and “introducing a single remuneration figure is a positive step forward”.
Roger Barker, head of corporate governance at the Institute of Directors, said it was right to drop plans to grant employees a place on remuneration committees but said boards should still consider ways to engage with staff over pay as part of “rebuilding trust in the UK business system”.
Barker also expects that binding shareholder votes on remuneration will encourage shareholder activism and “remind institutional investors of their key governance responsibilities”.
EasyJet founder Sir Stelios Haji-Ioannou told City A.M. the coalition had taken a step forward.
“Great news today from Vince Cable. I think it’s a great victory for individual investors.”
Legal & General Investment Management welcomed the proposals but Sacha Sadan, director of corporate governance, said he wanted to see directors’ remuneration linked to “clear and explicit” targets based on long term results. He also called on executives “to own a meaningful amount of shares in the company”.
Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide Investment, which has long called for investor pay controls, said: “The introduction of a binding vote on pay is a particularly welcome move. As always, the devil will be in the detail.”
Stuart Fraser, policy chairman at the City of London Corporation, was cautious, however. He said pay is an “emotive subject” and that British firms need to pay a competitive rate in order to retain internationally mobile staff”.
Sean O’Hare, remuneration partner at PwC, said the reforms would give Britain the “most rigorous regime” on executive pay in the world. He added, however, that the changes “may end up creating more confusion than clarity” and may not cut pay dramatically.
Campaigners for tough regulation of executive pay were disappointed. Len McCluskey, general secretary of trade union Unite, accused Cable of “lacking backbone” in his retreat from plans to let workers’ reps sit on pay committees.
IN DETAIL | CABLE’S PAY AND CONDITIONS
Binding votes on future pay, including details of how performance will be judged. Investors will be given a binding vote on any director’s notice period and exit payments longer than 12 months. Coalition will also consider creating a threshold of 75 per cent shareholder backing for any pay proposals.
The government will also extend to all listed firms a requirement for executive director contracts to include clawback mechanisms – not just in finance.
Vince Cable wants to see more people appointed to boards from different professional backgrounds, such as lawyers, public servants and academics, and people who are new to boards.
● Total pay
Companies will publish a single figure for the total package of each executive.
Boards will also be required to explain how executive pay compares to dividends, taxes, profits and so on.
Cable has pledged to look again at the make-up of pay committees. He cited figures showing that just six per cent of remuneration committee members at FTSE 350 companies are executives at other firms on the index.
● Worker representation
Cable dropped plans to include staff reps on remuneration committees because of the legal difficulties in giving positions to people who are not company directors. Firms will not be forced to publish “pay ratios” showing the gap between the CEO and the lowest-paid worker.
A binding vote on pay policy is a major change which would make directors more accountable and force companies to show they have taken account of shareholders’ views. The measure is not watertight, however, because investors will only get an advisory vote on how the policy is put into practice.
Clawbacks are a solid threat but will face legal challenges if they are too broad. This will only work in the case of obvious fraud or scandals.
Will the outside experts know their stuff? FSA rules dictate banks’ exec directors must have prior industry experience, for example. Also, many exec directors are already new to boards.
Total packages are already highlighted by the media. However more clarity is a good thing and reduces disputes. But total exec pay is actually already very small compared with profits or sales.
Yesterday Cable came close to admitting that the amount of “cross-over” between companies is actually relatively modest, especially at the exec director and remuneration committee level. He was vague about reform.
Practical concerns meant these proposals were always unlikely, although shadow business secretary Chuka Umunna (below) remains keen on the idea of workers’ reps.
(Words by Peter