The 30-year battle over boardroom pay enters a new phase on Tuesday when business secretary Vince Cable hands shareholders the power to throw out executive remuneration policies that are too generous and forces companies to simplify the data they provide about what they pay top bosses.
Cable is to give shareholders a binding vote on company pay policies once every three years and an advisory vote every year. He is also demanding companies publish a single figure for bosses' pay annually, rather than the wide range of numbers currently provided, which often require expert knowledge to add up. It is the latest of several efforts to clamp down on pay since the 1980s, when BOC Group's then chief executive, Richard Giordano, was the UK's highest-paid director and accused of executive excess for his £271,000-a-year pay deal.
Labour handed shareholders their first vote on remuneration policies in 2002 following the row over "rewards for failure" for directors of the failed telecoms company Marconi. That vote was only advisory and shareholders usually preferred to protest in private rather than show their anger in public. But the mood changed last year, when the 2012 company AGM season became known as the "shareholder spring". A record six pay reports were voted down and Cable, angered by spiralling executive pay that jarred with the government's austerity policies, decided to beef up the advisory vote.
On average, British bosses now earn 69 times more than the average pay of their workforce – although some get rewards equal to the pay of several hundred staff – and top pay has quadrupled in the last decade. Cable is concerned that these huge rises have not been related to performance. "At the same time, company reports have become increasingly complicated without giving shareholders the right sort of details they need in order to evaluate performance," he says.
However, he has backed away from a proposal that companies put employees on their remuneration committees and is relying on shareholders to monitor pay more effectively. But he insists: "The signs are that we are moving in the right direction. In the last year we've seen some restraint. Our reforms mean shareholders will now no longer be kept in the dark."
Robert Talbut at Royal London Asset Management says that the introduction of the new rules is already having an effect: "Companies are doing everything they can to avoid any confrontation next year. There is a lot of consultation taking place already."
The first companies to comply with the new rules will be those with financial years ending in September. Catering group Compass, cigarette company Imperial Tobacco and easyJet are among those to fall into this category. Their annual meetings take place in the new year.
Investors will have two new votes:
■ A binding vote on pay policy that needs majority support from those shareholders who vote every three years. The vote, which becomes binding from the next financial year, has been introduced to deal with serial offenders who simply ignore or fail to respond to pay protests – such as satellite operator Inmarsat and advertising company WPP, which have seen consecutive rebellions.
Andrew Stanger, a partner at international law firm Mayer Brown, says those companies that fail to secure shareholder support will need to hold an extraordinary general meeting shortly afterwards. He also believes firms will need to take care: "If a company makes a payment outside the policy then the payment is void and all the directors are individually liable to the company to reimburse the company and the individual."
■ An annual advisory vote on last year's pay settlements. This is intended to provide investors with a say on the actual pay awarded to directors, which needs to be in line with the policy approved by investors through the binding vote. If the annual vote is lost, the company will have to put the policy back to the binding vote on pay.
Companies are already required to disclose salaries, bonuses and information about shares released from long-term incentive schemes. But previously they could provide the information in any format, which made it difficult to make comparisons with rivals. The new pay rules will require a single figure to be reported for the total pay directors receive, covering salary, benefits, annual bonus, shares released from incentive schemes and pension contributions. Companies will also have to provide all details of payoffs.
Firms will also have to provide a breakdown of the amount spent on pay, the amount distributed to shareholders and any other significant outgoings. This will allow investors to see at a glance whether they are getting their fair share – and will highlight high pay. At Barclays, for instance, it would have shown that, in 2011, the bank paid out £2.1bn in bonuses – three times the £700m paid to shareholders in dividends.
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