Proposed major changes to the UK law on executive pay would give shareholders an annual binding vote on future remuneration policy, including proposed directors’ remuneration. Draft legislation is expected shortly following a consultation published by the UK government department for Business Innovation and Skills (BIS) in March and April 2012. The regulations are scheduled to become law in May 2013.
Vince Cable, UK secretary of state for business, first announced the proposed changes in January in the context of calls for greater transparency on executive pay and increasing shareholder activism on the issue.
Described as the most significant recasting of the UK’s executive pay regime since disclosure legislation was introduced in 2002, the most significant aspects of the reforms likely to feature in the new legislation focus on a new model for shareholder voting, which includes:
Earlier proposals unlikely to feature in the legislation include any requirement to have employee representatives on the remuneration committee and shareholders will not be represented on the nominations committee. Suggestions that companies should disclose the ratio of CEO to median employee pay and disclose pay arrangements below board level will also not feature in the new regime.
“Based on our regular talks with institutional investors, we believe the current advisory vote on the remuneration report works quite well and we don’t think there is a strong case for a binding vote,” commented Sean O’Hare, reward partner at PwC in the UK. “Just how the vote is structured will be crucial and it’s important that it should be on high-level future policy rather than on the specifics of each director’s pay package. The board, through the remuneration committee, sets management pay, and this responsibility should not be given over to shareholders.
“The proposed changes could lead to practical difficulties for companies, including four or five months of uncertainty over the structure of executive director incentive packages each financial year until the vote is taken at the annual general meeting,” O’Hare said. “The vote on exit payments could prove similarly impractical.”
"The binding vote may not actually empower shareholders – they may choose not to vote on remuneration policy if they fear a negative knock-on effect on the share price or board resignations. Requiring a 75% majority leaves the field open for minority shareholders to block the vote, which will lead to additional disruption for companies."