Business

Q&A: Voting on executive pay

Protesters at the BSkyB AGM
Image caption Dissent is relatively unusual at companies' annual shareholders' meetings

David Cameron wants to let shareholders decide how much top executives should get paid.

He says it is wrong for executive pay "to keep going up and up and up" when the companies have not been very successful. He told Andrew Marr that such awards were "frankly ripping off the shareholders".

What is the situation currently and how might the government change it?

Do shareholders not get a vote at the moment?

At the moment, the pay of the top executives in a company which is listed on the stock exchange is decided by the company's remuneration committee.

The remuneration committee is made up of non-executive directors, who are members of the board employed to oversee the running of the company, rather than actually running it themselves.

At the company's annual meeting, the shareholders get to vote on what that committee has decided, which includes all of the pay, bonuses and pension provision of the directors of the company.

That is currently only an advisory vote, which means that the company can completely ignore it if it wants to.

Would it not look bad to ignore a majority vote against the directors' pay?

It would look bad, but it is desperately unusual to get more than 50% of shareholders voting against anything.

In fact, it is quite unusual to have more than 50% of shareholders voting at all.

A 20% vote against something at a shareholders' meeting would be easily enough to tell the directors that there was serious dissatisfaction.

The problem is that there is not a great deal of activism among shareholders. Many shares are owned by enormous pension funds, some of which do not bother to turn out and vote.

How would making the vote binding help?

Making the vote binding could encourage more engagement with shareholders.

There is evidence that shareholder engagement has increased since the advisory votes were introduced.

"Binding votes would suddenly make this all a lot more interesting," says Phineas Glover, corporate governance analyst at The Co-operative Asset Management.

But he adds that in practice it could create difficulties about what would happen if the remuneration report were to be voted down because it would leave executives working for a lot of the year not knowing the details of their pay packages.

The Co-operative Asset Management instead advocates having a binding vote on the previous year's total pay and an advisory vote on the framework for the current year's pay, including such factors as maximum possible awards.

Exactly what does Mr Cameron want to do?

So far, all he has said is that he wants shareholders to get a binding vote on executive pay and that he wants complete transparency on the amounts being paid.

Business Secretary Vince Cable is due to publish the results of a consultation on boardroom pay later in January and may outline then what specific measures will be taken.

The Prime Minister said there would be legislation in the Queen's Speech in the spring.

What about stopping rewards for failure?

Mr Cameron is very keen on stopping people being rewarded for failing. It is hard to imagine anybody supporting rewards for failure in principle.

The tricky thing is that the amount bosses get paid if they lose their jobs is often written into their contracts, so there is little anyone can do once they have been dismissed.

One possible way round it is for shareholders to vote on their severance packages when they are first employed.

That already happens and the biggest shareholder revolt against a FTSE 100 company was in 2003 when 50.72% of GlaxoSmithKline shareholders voted against a remuneration package that would have seen chief executive Jean-Pierre Garnier receive a payment estimated at £22m if he had lost his job.

The trouble was, that vote was not binding, but under the governments proposals it is likely that it would be binding in the future.

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