Industry Insights

9 August, 2012

Executives at British companies may soon see a change in how their pay is determined, as legislation introduced in the UK recently would give shareholders power to veto director pay deals. The move puts the country in the vanguard of a clampdown on corporate pay.

Shifting more control to shareholders with regard to the level of pay for those in executive jobs is part of a movement toward linking pay more closely to performance in response to shareholder objections as well as public outcry, Reuters reported. Currently shareholders have only an advisory vote on directors' compensation, which is not binding.

Business Secretary Vince Cable, a Liberal Democrat, led the push. "At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors' pay rising at 10 percent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen," said Cable.

Votes on executive pay would also be binding under the new plans, BBC News reported. Once a vote is cast, companies in the UK would be required to stick to their pay plans for three years or have another shareholder vote. There is also a push for greater transparency. Companies will have to publish a simple figure every year showing how much executives have been paid. This includes exit payments if an executive has left the company.

While the investor community has applauded the move, there is opposition in other camps. "If binding votes every three years deliver improved levels of shareholder accountability, we have no objections," said John Longworth, British Chamber of Commerce Director General. "But government intervention should stop there. Setting levels of executive pay is a matter for companies, their boards, and their shareholders, not politicians." Businesses in the UK have also voiced displeasure over the government’s hand in executive compensation.

Regardless of this sentiment, change appears to be on the horizon in the UK and elsewhere. The rest of the European Union is also considering proposals to strengthen shareholder control over executive pay. In the U.S. pay increases for top executives, which rose in 2011, have slowed in response to shareholder pressure and public disapproval.