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New rules will make executive remuneration more transparent
Last Monday (23 January) the business secretary Vince Cable announced long-awaited changes to reform the governance of executive pay for listed UK companies. While many of the proposals had been trailed, they nevertheless represent the biggest overhaul of executive pay rules for a decade.
The proposals can be grouped under four main headings: improving transparency; increasing shareholder power; reform of remuneration committees; and ensuring best practice, led by the business and investor community.
The most significant change is the binding vote for shareholders on future pay. This will force much greater engagement between corporates and shareholders, as no one will want the figures that are subject to vote to come as a surprise. It is true that shareholders will be loath to use the binding vote, but for this reason they will want to be involved beforehand in remuneration decisions.
In strengthening the hand of institutional shareholders the binding vote will put the spotlight on the proxy agencies that advise them. These mainly US entities sit outside UK regulation, so there could be questions around accountability if they are to have much more influence on UK plc.
We may see their role examined as part of the Kay Review into investment in UK equity markets and its impact on the long-term performance and governance of UK-quoted companies.
Other key proposals include making companies disclose single figures for executive directors’ pay. Requiring remuneration committees to justify the link between pay and performance is no bad thing, but given the varying timeframes and performance periods of executive pay programmes, this measure may end up creating more confusion than clarity.
It is no surprise that clawback will become compulsory for all companies following the adoption of this measure by regulators in the financial services sector. Given the present political environment, business cannot really complain about what is on the table. The Government has listened to the main concerns expressed and companies will not be required to include employee representation on companies’ remuneration committees, nor disclose the ratio of CEO pay to median employee earnings.
Certainly, there is nothing onerous enough in the proposals to affect a company’s willingness to list in the UK. However, there is much work afoot for corporates in simplifying and communicating information.
But will the changes meet their objectives? Anyone who thinks pay does not reflect what shareholders want should feel satisfied - shareholders now clearly have all the information and tools at their disposal to hold remuneration committees to account. Nowhere else in the world will executives see their pay subjected to such scrutiny.
Whether the changes have any impact on actual pay levels is another matter. Certainly, anyone expecting to see a dramatic drop in pay levels is likely to be disappointed, but the measures should help build public confidence in the fact that executive pay decisions are subject to proper scrutiny and conducted in a transparent manner.
They give shareholders everything they need to hold companies to account on pay.