Vince Cable has published proposals on executive pay designed to boost transparency; give shareholders more effective control, increase the diversity of remuneration committees and deal with conflicts of interest.
The measures are intended to create a more robust framework for the setting of executive pay. However, Mr Cable notes that lasting reform depends on active shareholders and responsible business leaders accepting the need for change and pushing the agenda forward.
His proposals have been broadly welcomed by business and institutional investor bodies, including the Confederation of British Industry, the Institute of Directors, the Association of British Insurers and the National Association of Pension Funds.
Secondary legislation is planned for later in 2012 which would require remuneration reports to be split into two sections, one detailing the proposed future policy for executive pay; the other setting out how pay policy has been implemented in the preceding year.
In relation to future pay, the remuneration report would have to explain:
- why specific benchmarks have been used
- how employee earnings, including pay differentials, have been taken into account
- how employees' views have been sought and taken into account
- how the proposed pay structures reflect and support company strategy
- how performance will be assessed and how it will translate into rewards under different scenarios
In particular, there should be greater openness on the performance criteria for bonuses and on exit payments.
In relation to past pay, the remuneration report would be required to:
- include a single figure for total pay for each director
- explain how pay awards relate to the company's performance
- include a distribution statement, outlining how executive pay compares with other dispersals such as dividends, business investment, taxation and general staffing costs
Consultations will begin shortly on replacing the current advisory shareholder vote on the remuneration report with the following:
- a binding shareholder vote on the future pay policy for the board as a whole, including details of how performance will be judged and real numbers on the potential pay outs directors could receive
- a requirement for shareholder approval of any directors' notice period longer than a year and of exit payments of more than one year's basic salary
- a shareholder vote on how the company has implemented the approved pay policy in the preceding year, including the amounts paid out: this vote would be advisory rather than binding, but sanctions may be introduced which could be applied when a significant number of shareholders dissented in the advisory vote
There will be consultation on whether the threshold for shareholder votes on pay should be increased to 75% of the votes cast.
In addition, the Financial Reporting Council (FRC) will be asked to amend the UK Corporate Governance Code to require all large public companies to include clawback provisions in executives' contracts, enabling the company to withhold or recoup pay awards when performance has not lived up to expectations.
The FRC is also strongly encouraged to develop the Stewardship Code, to ensure that shareholders are incentivised to use the new powers that will be available to them.
Diversity and conflicts
Vince Cable notes that shareholders and boards need to step up their game in relation to diversity in the board room and on remuneration committees, but no new initiatives have been announced. In particular, there are no proposals to require employee representation on boards.
In relation to conflicts of interest, the FRC will be asked to amend the UK Corporate Governance Code to put an end to the practice of serving executives sitting on the remuneration committees of other large companies.
There will also be a requirement for greater transparency around the role of remuneration consultants, including how they are appointed, to whom they report and whom they advise, and their fees.
Click here for Vince Cable's written ministerial statement.
MMS is hosting a seminar at its Glasgow office organised by the Scottish Competition Law Forum on 28 February from 4.30pm. The topic is Competition Law and the Individual. It promises to be an extremely interesting event with three motivating speakers.
Philip Collins, Chairman of the OFT, will focus on what companies can do to achieve compliance, providing tips to directors on how to bring about a compliance culture and the consequences of failure to adhere to the laws. Keith Packer will provide personal insights into consequences for individuals of breaching the law. Our third speaker, Professor Mark Furse, will outline his own misgivings about the viability of the UK's criminal cartel offence.
All businesses, and the individuals who work for them, can be affected by competition law. Indeed, as market mechanisms enter the public sector more and more, they too can be caught by competition law. This is a unique opportunity for businesses and individuals within them to understand the risks and help inform their own compliance procedures.
To register for this event, please email firstname.lastname@example.org.
For further information, please contact:
0330 222 1838
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.