Companies in the UK will have to introduce binding votes on executive pay under new plans announced by Business Secretary Vince Cable today.
Arguing that there is evidence of a disconnect between pay and performance in large UK-listed companies, Cable said that the proposals will give shareholders more power to challenge excessive pay “whilst not imposing unnecessary regulatory burdens”.
Under the reforms shareholders will be entitled to binding votes on the directors’ pay policy and exit payments every three years, or annually if changes are made. According to the Department for Business, Innovation and Skills the aim is to make it easier for shareholders to hold companies to account and prevent rewards for failure.
Additionally, the government hopes that the changes will encourage companies to stick to a long-term pay strategy.
At present shareholder votes on directors’ remuneration are only advisory and companies can choose to ignore the result.
The reforms are also designed to make remuneration more transparent, so that it is easier to understand what directors are earning and the link between pay and performance can be clearly drawn.
In recent months shareholders have become more active in expressing their unhappiness about high levels of executive pay. Last week shareholders of advertising and marketing services provider WPP plc (LSE:WPP) voted against the company’s remuneration report and a similar vote at insurance firm Aviva plc (LSE:AV.) in May went the same way, leading to the departure of the company’s chief executive, Andrew Moss.