Following up on the package of measures Vince Cable announced
earlier this year (see our
January 2012 update), in its latest consultation on executive
pay published in March 2012 the Department for Business, Innovation
and Skills (BIS) is making the following proposals, among
others:
Enhanced shareholder rights.
Remuneration report. Rather than giving shareholders the option
of a binding vote on all remuneration issues, BIS are proposing to
amend the existing reporting regulations and to split the
directors' remuneration report into two sections:
One section would outline the proposed future remuneration
policy and potential payouts. The Government is proposing making
this section subject to an annual binding shareholder vote; for
this shareholder vote to pass, the Government is considering
requiring a higher than 50% but lower than 75% majority of the
votes cast.
The other section of the remuneration report would explain how
remuneration policy was implemented in the previous financial year,
including actual payouts made. This section is proposed to remain
subject to an advisory shareholder vote only.
Shareholders would be able to vote separately on each
section.
Exit payments. To address cases of 'payment for
failure', BIS is further proposing a binding (ordinary)
shareholder vote on any exit payment to a director which exceeds
the equivalent of one year's base salary. This is proposed to
come into effect on 1 October 2013. After that date, any provisions
in directors' service contracts and other arrangements
providing for an entitlement to exit payments beyond one year's
base salary would be void. This is proposed to apply to both
existing and new contracts. Companies would therefore need to amend
existing contracts before 1 October 2013.
More transparency. Despite previously voiced criticism by the
business community in relation to the Government's discussion
paper on executive pay, BIS are proposing to go ahead with their
requirement for the backward-looking section of the remuneration
report to include, among others, a single figure for the total pay
of each individual director.
The deadline for this consultation is 27 April 2012 and the
Government is expected to publish its final proposals for enhanced
shareholder voting rights early this summer.
The proposed changes, if adopted, will radically change the way
companies engage with their shareholders when setting executive
pay. For shareholders this is a welcome change as they will have
much greater say on the matter. It will be interesting to see how
companies deal with the proposed enhanced shareholder voting rights
in practice, especially in relation to the remuneration packages
they can offer when recruiting directors in-year and in relation to
exit payments.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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