U.K. Shareholders to Get More Control Over Executive Pay

Public companies in the U.K. will have to give shareholders binding votes on executive-pay structures every three years, Business Secretary Vince Cable told lawmakers.

Other measures in the package, to take effect in October 2013, will require companies to publish a single figure for what each director is paid in total, their pension entitlement and a chart comparing the company’s performance and the chief executive officer’s pay. When directors leave, the company will have to publish “promptly” a statement of their payoff.

A study last year by the High Pay Commission, a pressure group that pushes for curbs on top earners, found British directors’ salaries increased by 64 percent over the past decade, while the average year-end share price of FTSE 100 companies fell 71 percent. The average annual bonus for directors rose 187 percent, according to the panel.

“There is compelling evidence of a disconnect between pay and performance in large U.K.-listed companies,” Cable said in a statement to Parliament today. “It is right that the government acts to address this clear market failure.”

Cable said he hoped that having votes on pay structures every three years, rather than annually, will encourage longer- term thinking. If a company changes its structures, it’ll be forced to have a fresh vote.

Long-Term

“This will encourage companies to set out and stick to a clear, long-term pay strategy,” Cable said. “And it will help put a brake on the annual upward pay ratchet.”

The moves, which will be implemented through amendments to the Enterprise and Regulatory Reform Bill currently before Parliament, are aimed partly at ending “golden goodbye” packages for departing executives, often criticized as rewards for failure. The policy on exit payments will be part of the package that shareholders vote on, and companies won’t be able to go beyond it.

Chuka Umunna, the opposition Labour Party’s business spokesman, said that having votes every three years would weaken the proposals. “Isn’t it the case that this incentivizes boards to draft policy as broadly as possible?” he said.

The pay-policy vote will see the company explaining to shareholders how rewards support the company’s objectives, and how directors’ pay compares to that of the wider workforce.

Advisory Votes

Alongside the binding vote every third year, companies will continue to have advisory annual votes on how the policy has been implemented. If these votes are lost, it’ll force a binding vote on policy the following year.

Companies will have to make a statement when a “significant minority” vote against a pay resolution. No threshold has been set, but Cable said he thought it should be around 25 percent.

Business leaders welcomed the move. Simon Walker, director- general of the Institute of Directors, said Cable’s proposals “reflect a reasonable balance between improving the accountability of executive pay and encouraging a longer-term business perspective.”

It’s “important for investors and the manager they choose to run a business to be in alignment,” John Cridland, the director general of the Confederation of British Industry, the country’s biggest lobby, told BBC Radio 4’s “Today” program earlier. “I don’t think today’s proposals hobble management. But it does show you who is in charge and that’s the owners.”

In the U.S., the Dodd-Frank Act has given shareholders a non-binding vote on top executive compensation since January 2011. In August, pay experts said companies whose policies on compensation got a vote below about 80 percent were taking it as a sign of shareholder discontent.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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