(Updates with opposition, legal reaction starting in eighth paragraph.)
Jan. 23 (Bloomberg) -- The U.K. government will legislate to give company shareholders a binding vote over executive compensation, including the length of notice periods, to ensure failure is not rewarded, Business Secretary Vince Cable said.
“The evidence is clear that business and investors recognize there is a disconnect between top pay and company performance and that something must be done,” Cable told lawmakers in the House of Commons in London today. “We cannot accept top pay rising at five times average workers’ pay as we did last year.”
Cable said he wants the largest public companies to publish clear details of how much their highest-paid executives get, along with information about average salaries within the companies. He said they should consult staff about top pay, recruit board members from wider backgrounds and implement “clawback” arrangements under which pay can be recovered if a company does badly.
The government and the opposition Labour Party are trying to offer proposals to make capitalism function better as the bank bonus season approaches, with the prospect of large sums being paid to financiers. With U.K. unemployment at a 17-year high, public-sector pay frozen and 700,000 government jobs being cut to help narrow the budget deficit, Prime Minister David Cameron pledged earlier this month to tackle high levels of executive pay that make “people’s blood boil.”
Binding votes will require a new law, and Cable said the government will hold consultations on how to implement votes on both pay and notice periods. Shareholders would get a vote on any director’s notice period longer than one year and on exit payments of more than one year’s salary.
Cable cited a study by the High Pay Commission, a pressure group that pushes for curbs on top earners, that found British directors’ salaries increased by 64 percent over the past decade, while the average year-end share price of FTSE 100 companies fell 71 percent. The average annual bonus for directors rose 187 percent, according to the panel.
In the U.S., the Dodd-Frank Act has given shareholders a non-binding vote on top executive pay since January 2011. In August, compensation experts said companies whose policies got a vote below about 80 percent were taking it as a sign of shareholder discontent.
Workers on Boards
The opposition Labour Party’s business spokesman, Chuka Umunna, told lawmakers the measures don’t go far enough in promoting “the transparency, accountability and fairness that people want to see,” with no plans to put rank-and-file employees on remuneration committees.
Cable said that while worker representation on boards was desirable, it was hard to prescribe for it, as some companies have most of their staff overseas. He said there are also difficulties with mandating limits on pay ratios.
While stopping short of forcing companies to put employees on boards, Cable said he wants company directors to be drawn from more diverse backgrounds and that he would like to see at least two board members in each company who hadn’t previously been on the board of another business. He also said he intends to look further at whether members of remuneration committees should be executives in other companies.
The main business lobby groups, the Institute of Directors and the Confederation of British Industry, welcomed Cable’s statement. “It is encouraging that some of the heat has been taken out of this issue by government coming up with some practical proposals,” CBI Director-General John Cridland said in a statement.
One of Cable’s aims is to avoid unintended consequences. That may be difficult, according to Nicholas Stretch of law firm CMS Cameron McKenna in London.
“The main concern listed companies are likely to have is how it will be manageable for shareholders to have a veto on pay and yet still give their executive directors reasonable certainty over their remuneration,” Stretch said in an e-mail. “Otherwise, fairly soon working for non-listed companies or simply declining to take a seat on the board could start to look very attractive. These proposals could also ironically lead to higher salaries and more joining bonuses.”
--Editors: Eddie Buckle, Andrew Atkinson
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