Will empowered investors curb excessive pay?

Vince Cable

Although Vince Cable may be accused by Labour and some corporate governance campaigners of not being as tough as he could have been with his executive pay reforms, the plans he announces today to give more power to shareholders to curb excessive boardroom rewards will worry many business leaders.

They will make it easier to see precisely how much those who run our biggest companies are actually earning.

And they will force companies to set their policies for three years, with any serious departures from these policies having to be put to another shareholder vote.

The business secretary's main reforms are these:

  • Every three years companies will have to get authorisation from shareholders via a vote at the annual meeting for how they intend to pay their top executives. The pass rate for the vote would be a simple majority and companies would have to stick to those formulae when allocating rewards until the subsequent vote. In other words, these three-yearly votes would be binding on companies, in contrast to the current system of annual advisory votes.
  • For the first time, companies will be obliged to publish a simple, single figure in their annual reports, showing how much top executives earned in the previous year. This will include salary, bonuses and any shares that have vested from incentive schemes during the previous 12 months.
  • The pay policies of companies will have to specify the amounts that would be paid to executives if they were to quit or be sacked. It would be a breach of the law for companies to pay so-called exit payments or golden goodbyes that were more than those pre-authorised amounts.

Robeert Peston: A 12% increase in average pay accross the board... shows that the system is bust

Now, some may accuse Mr Cable of letting companies off the hook by not insisting on an annual, binding vote. However, he would argue that the three-yearly votes should reduce the pace of rises in executive pay, in that the current system of setting pay every year has in practice ratcheted up boardroom rewards far faster than pay has risen in the rest of the economy.

What may also temper executive pay rises is the new simplicity and clarity Mr Cable hopes to bring to the question of how much bosses actually pocket every year. Right now it is very difficult to see the total amount that any executive takes home because the remuneration sections of annual reports are immensely long, complex and woolly, especially in regard to earnings from large and important long-term incentive plans.

What is more, the removal of companies' rights to individually negotiate severance terms could end the perennial scandal of failed executives being paid a fortune when they are being forced out the door.

In theory, the greater transparency in respect of what executives are paid, combined with the new compulsion for companies to stick to pay policies agreed with investors, should change the balance of power between investors and boardrooms, in favour of the owning class and away from the managerial class.

There will be greater responsibility on shareholders to ensure there is a proper link between remuneration and a company's performance, because they should have the tools to do so. If they continue to permit excessive executive pay, it would then be reasonable to be worried that there is a fundamental flaw in our version of stock market capitalism. See my previous blog, the myth of a shareholder spring, for more on this.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 87.

    They are all in it together. Great idea, and going against popular opinion I like VC for his honest views. The trouble is turkeys (pension fund managers who oversee your money and get paid vast amounts and are the majority voters) don't vote for Christmas (ie. having their "renumeration" reduced by by a few hundred grand), So us little tax payers will be beholden to this rotten system.

  • rate this

    Comment number 86.

    Looks like a Julian Assange HYS is still censored at the BBC

  • rate this

    Comment number 85.


    Of course it wont work.

    Why should it?

    These people get away with it.

    Because they can.

    Over the years it has become acceptable for the devil to take the hindmost.

    So they do.

    Simple really.

  • rate this

    Comment number 84.

    It's a fascinating topic. Evidently it is unjust for executives to work for thirty years and then earn large salaries, yet it is just and proper for people to inherit vast shareholdings which pay them vast dividends before they reach maturity.

    How does that work? It seems that the new myth is simple: All shareholders are small folks. Shareholders are middle class.

    Like the Queen. And the Lords.

  • rate this

    Comment number 83.

    How are all these reports going to be verified? By the auditors? (and their exacting and competitive marketplace).. Their track record doesn't encourage hope. I also agree with 64, it's the poxy shareholders and the block vote prearranged in Pall Mall or on the golf course that is the insipid corruption needing to be stamped out. However a small step from Vince 'honey-trap cobbled' Cable


Comments 5 of 87



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