Shareholders to get more say over directors’ pay

Shareholders are to be given greater control over directors’ pay and bonuses under reforms put forward by the Government.

The new measures will give shareholders binding votes on pay policy and exit payments, enabling them to hold companies to account and prevent rewards for failure.

Ministers say they will also boost transparency so it is easier to understand what directors are being paid and ensure that the link between pay and performance is clearly drawn.

A Government statement provides the following summary of the new measures:

• A binding vote on pay policy, requiring the support of a majority of shareholders voting to pass. The policy should clearly set out how pay supports the strategic objectives of the company and include better information on how directors’ pay compares to the wider workforce.
• The binding vote will be held annually unless companies choose to leave their remuneration policy unchanged, in which case it will be compulsory at least every three years. For the first time, once a policy is approved companies will not be able to make payments outside its scope. If a company chooses to change its pay policy, it will have to put it before shareholders for re-approval. Importantly, this will encourage companies to devise long-term policies and put a brake on annual pay ratcheting.
• As part of their pay policy, companies will have to clearly explain their approach to exit payments, which will also be subject to the binding vote. When a director leaves, the company will have to promptly publish a statement of payments the director has received. Companies will not be able to pay exiting directors more than shareholders have agreed.
• Alongside the binding vote on policy, shareholders will continue to have an annual advisory vote on how pay policy was implemented in the previous year, including actual sums paid to directors. If a company fails the advisory vote it will be required to put its overall pay policy back to shareholders in a binding vote the following year.
• In addition, the Financial Reporting Council will consult on updating the Corporate Governance Code so that companies should make a statement when a significant minority of shareholders vote against a pay resolution.
• Companies will have to report a single figure for the total pay directors received for the year. This figure will cover all rewards received by directors, including bonuses and long term incentives. Companies will also have to report details of whether they met performance measures and a comparison between company performance and Chief Executives’ pay.

The new measures will be included in the Enterprise and Regulatory Reform Bill, which is currently before Parliament and is expected to be enacted by October 2013.

Please contact Jon Alvarez if you would like more information about the issues raised in this article.