Revised Proposals Give Shareholders Reduced Control of Executive Director Pay

United Kingdom
Vince Cable, the Business Secretary, has announced revised proposals which give shareholders reduced voting rights on executive director pay in listed companies compared with the proposals published in a consultation paper in March (please click here for our earlier Law-Now on the previous proposals).

Listed companies will now only need to hold a binding vote on future remuneration policy once every three years provided their pay policy is left unchanged in the meantime. There will also now no longer be a requirement at the time of departure to obtain specific shareholder approval of exit packages to directors in excess of one times salary.

Full details of the new proposals will be contained in amendments to the Enterprise and Regulatory Reform Bill to be published shortly.

The main proposals are as follows, and involve one binding and one advisory vote:

Binding vote on current and future remuneration policy

Companies will be required to produce a “pay policy” which will be subject to a binding vote by shareholders at least every three years.  The pay policy will include key information about executive director pay, performance targets, exit payments (see below) and material factors – in particular shareholders’ views and employee pay – taken into account when setting pay policy. It is assumed (but not clear from the press release) that this covers both the current year and future years.

Any change to the policy in the meantime (presumably only making it more generous to executives) would mean that companies would need to hold a vote sooner.  The draft legislation will need to be considered further to determine how much flexibility companies will have before they need to go back to shareholders.

If a vote is lost, the company will be required to continue to use the existing policy until a revised policy has been agreed, either at a new general meeting or at the next AGM.

Advisory vote on implementation

The existing annual advisory vote on how pay policy has been implemented in the past year will be retained.  However, companies will be required to provide more information in an “implementation report”, including providing a single remuneration figure for each director, more information on how pay (in particular CEO pay) is linked to performance and more detail on exit payments (see below).  The single remuneration figure will reflect actual pay earned rather than potential pay awarded – for example, long term incentive awards will be included in the year when they vest rather than at the time the award is granted.

A company which fails the advisory vote will be required to seek a binding vote on pay policy the following year even if a vote was not due that year. 

Threshold of support

The Government has rejected proposals to increase the threshold, possible to as high as 75%.  Instead, both the binding and advisory vote will require a simple majority. 

However, the Financial Reporting Council (FRC) intends to consult on changes to the Corporate Governance Code which may require companies that have a substantial minority of shareholders vote against pay policy or implementation, to publish a statement outlining how they will address shareholder concerns.

Exit payments

A key element of the previous proposals was the requirement to obtain shareholder approval for any exit payments to directors of more than one times salary.  Companies will now only be required to set out their approach to exit payments as part of the pay policy on which shareholders will have a binding vote, rather than to seek a specific vote each time.  However, companies will be required to operate within that policy when paying departing directors and so it is anticipated that companies will aim to be as flexible as possible in their policy to give them more freedom for dealing with leavers.

Companies will also be required to publish a statement setting out what a director has received promptly after the director departs.  Details of exit payments will also be included in the new implementation report.

Timetable for change

The changes are intended to be introduced later this year and to apply to financial years ending after 1 October 2013.

The fact that the Government has moderated its proposals will be welcomed by companies, but the climate in which director pay is decided has changed noticeably over the period in which the consultation has taken place. Indeed, while the detail of the legislation will need to be examined, it is likely to be shareholders' views on this subject as expressed to companies which will be the real motor for change over the next few years rather than these legislative developments.

A copy of BIS’s guide to the new proposals is available here.