It's Happening in the UK: Binding Say on Pay

News Brief

By Cydney Posner

It's happening in the UK.  According to this article in the NYT, Vince Cable, Britain's business secretary, presented measures today to Parliament to make shareholder votes on executive pay binding, all part of efforts by the Tory government to reign in excessive remuneration and allow shareholders to hold companies accountable. There doesn't appear to be much question about whether the rules will be approved by Parliament Labor thinks they do not go far enough. They are expected to become law in October 2013.

According to this article in The Telegraph, shareholders would be given a "binding vote on remuneration annually, unless companies choose to leave their pay policy unchanged, in which case the vote will happen every three years." Majority shareholder vote will be required. Companies will be required to publish a single figure for the total remuneration of each executive that would include salary, bonus, options and benefits, as well as a chart comparing company performance and CEO pay. When an executive left a firm, the company would be required to disclose severance or other termination pay "promptly," and it would be subject to a shareholder veto. Mr. Cable is quoted as saying "the measure would encourage companies ‘to set out and stick to a clear, long-term pay strategy and it will put a break on the annual upward pay ratchet.'"

The UK Financial Reporting Council will further consult on additional measures such as "extending clawback provisions and limiting the practice of executive directors sitting on the remuneration committees of other companies."

The Telegraph suggests that the revised measures resulted from "months of consultations with investor groups and companies, [and] won support from business groups. [T]he director general of the Confederation of British Industry said the measures struck ‘a balance, by giving shareholders increased transparency on pay and providing ways to hold boards to account, without getting them bogged down in day-to-day micro-management.'" The WSJ disagrees, contending that business leaders accuse the government of "meddling" and have "pushed back against the government's plans, arguing that decisions about matching pay packages to performance should be in the hands of a company's nonexecutive director."

The Labor party complained that the proposals were watered down from the originals, favoring an annual vote regardless of increase in pay and. (See News Briefs 11/15/11, 1/23/12 and 6/13/12.) Labor also favored  Mr. Cable's original proposal to include employees on compensation committees, a position Cable now views to be "unworkable." Apparently, he will instead opt for another non-binding measure and "ensure workforces are consulted ahead of pay plans."  The Telegraph article also quotes a knighted former CEO who agreed with Labor's complaint: "He said the problem was a discussion between remuneration committees and executives were too cosy. ‘Basically chief executive have inspirations' and remuneration committees give in too easily…."

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