Business secretary Vince Cable announced the reforms today, aiming to encourage shareholders to engage effectively on pay.
The measures proposed include giving shareholders binding votes on pay policy and exit payments, improving transparency so that what people are paid is easily understood and making the link between pay and performance clearer.
This means for the first time a legally binding vote means investors can overthrow pay proposals and prevent companies making payments within that scope. The move is a climb down on previous aims to hold compulsory votes on pay annually, but is still a dramatic change on current rules in which shareholder votes are advisory and can be ignored by companies.
Shadow business secretary Chuka Umunna criticised the plans for falling short."It is deeply disappointing that having marched us all up the hill he appears to have marched us back down again," he said. Binding votes will be held every three years, under today’s proposals.
The reforms will be introduced through amendments to the Enterprise and Regulatory Reform Bill, which is currently going before Parliament. Revised regulations setting out how companies must report directors’ pay will be published at the same time.
Vince Cable said, “At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10% a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.
“In January we kicked off a national debate aimed at encouraging shareholders to become more actively engaged as company owners in better aligning directors’ pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained.
"That is why I am bringing forward legislation to strengthen the powers of shareholders through a binding vote on pay.”
The government intends all these reforms to be enacted by October 2013.
The proposals have met with mmixed reactions from the business community. The Association of British Insurers, whose members include some of the biggest institutional investors in the City, welcomed the proposals, saying they were "practical, workable and should help tackle excessive executive pay".
However, Jo Iwasaki, ICAEW’s head of corporate governance, said the plans to vote every three years were "unnecessary".
"Recent events have shown that shareholders already have sufficient power to change company policy on pay if enough of them feel they need to," she said. "There is a role for legally binding votes on an ad hoc basis – for example if a board were continuously ignoring the wishes of shareholders – but demanding them as a matter of routine could damage relations between shareholders and the remuneration committee.
“Also, initiatives on shareholder engagement must take into consideration the modern, complex, nature of share ownership. ‘Shareholders’ should not be seen as a single, homogenous, group, when they might include a range of institutional investors, hedge funds, private equity funds, sovereign wealth funds, activist investors and intermediaries including proxy agents.”
The so-called ‘shareholder spring’ has seen shareholders at Aviva vote down its remuneration report, and last week, shareholders in the advertising group WPP voted against the company's executive pay report, including a £6.8m deal for chief executive Sir Martin Sorrell, by a majority of 59.5%.
The independent regulator said the government has also asked it to consult on whether companies should report to the market if they fail to obtain a substantial majority of support for a remuneration proposal.
The FRC will consider the possibility of changing the UK corporate governance code after the government’s legislation on voting and reporting on executive remuneration has been finalised.
FRC chairman Baroness Hogg said, “The FRC will reflect on the case for changes to the Code once the legal requirements on companies are clear. We will undertake a full consultation, and there is no presumption on the FRC’s part as to the outcome of that consultation. All interested parties will have an opportunity to make their views known before we reach a final decision, which will also take into account any developments in company and shareholder practice, including the use made by shareholders of their right annually to vote on the election of directors.”
The FRC is also currently consulting on changes to the corporate governance code which would require FTSE 350 companies to put the external audit contract out to tender at least every ten years and encourage more meaningful reporting by audit committees. If implemented these changes would come into effect in October 2012.