In a suddenly arranged Parliamentary announcement, the
Government has said that it is to press ahead with giving
shareholders in listed companies extra powers. Shareholders
will have a binding vote on director pay arrangements
going forward and crucially a departing director will not be
able to receive more than 1 times annual salary in any termination
payment without prior shareholder approval.
Because of the forced nature of this announcement, details are currently very sketchy, including when this will all take effect, but this could lead to a significant change in UK practice. While notice periods themselves are now generally limited to 1 year already and so notice pay is therefore often limited to this anyway, bonuses for part years worked, outstanding share plan awards and pension rights complicate the picture here so that overall payments are often greater than 1 times salary. More detail on this will be eagerly awaited. Australia has had similar legislation in place for a few years and that has shown implementation of these kinds of rules to be particularly problematic.
These and other related proposals can be grouped under some general headings:
- Greater transparency - legislation is promised later this year to require companies to give more details on relative performance of a company, pay differentials within a group and improving employee involvement in monitoring pay (possibly as part of the Information and Consultation Regulations which already give employees rights to information on key business decisions), a single figure on overall remuneration and setting out how much is paid out in executive remuneration compared with dividends etc.
- Binding votes - the Government is going to consult on how to extend shareholder power by requiring binding votes on forward looking remuneration and termination payments in excess of 1 times salary. The Government is also thinking about what level of shareholder approval should be necessary for votes on remuneration - should it be 75% rather than the existing 50%, for example?
- Diversity - aside from moves for greater gender diversity on boards, consideration about whether to ensure fresh views by (for example) reserving places on boards for those who have never been a member of a board before and excluding a director who is an executive director at another company.
- Clawback - all listed companies will have to have some form of clawback of pay in the event of severe under-performance, though clawback can mean so many things that much more information will be needed on what is meant here.
To read the Government announcement click here
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 24/01/2012.