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Shareholders, companies welcome executive pay proposals

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  • Shareholders, companies welcome executive pay proposals

UK - Proposals to subject UK listed companies to a binding vote on executive pay have been warmly welcomed by shareholders and companies alike, with the country's pension association saying the new measures should help lift the "cloud of complexity" surrounding remuneration.

Announced yesterday by the department for business, innovation and skills (BIS), the final proposals fell short of initial plans for an annual binding vote on pay packages, but allow shareholders to contest changes if these occur within three years of the last binding vote.

Business secretary Vince Cable said he had been greatly encouraged by the recent shareholder spring - which saw the resignation of several company chief executives over disputed packages - and added that he wanted to see the momentum continue.

"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," he said.

David Paterson, the National Association of Pension Fund's head of corporate governance, said its members had been increasingly concerned about the "cloud of complexity" surrounding remuneration, and that the binding vote would help "put the brakes on".

"This is an opportunity for everyone to rethink pay policies and to aim for restraint, simplicity and transparency," he said.

"The goal must be to better link pay and performance so it can be explained and justified.

He said he was also pleased about plans that shareholders would have to be shown details of exit packages sooner than previously the case.

John Cridland, head of UK business lobby CBI, said the proposals "struck a balance" by allowing increased transparency without resulting in shareholders being involved in day-to-day macro-management.

He added: "Requiring a vote every three years, unless pay plans change, will allow shareholders to stay focused on the big picture."

Mercer acknowledged that current levels of pay reflected a "market failure", but its head of human capital Christopher Johnson warned that the vote could restrict the ability to compete for talent.

However, Johnson added that the binding vote being conducted every three years rather than annually would allow for more longer-term remuneration planning.

Otto Thoresen, director general of the Association of British insurers, welcomed the plans as practical and workable and said he was pleased the government was aiming for a 50% threshold for voting.

"Having a vote on a three-year remuneration policy should help the task of keeping executive pay proportionate and aligned to corporate strategy," he said. "Having a fixed annual vote on pay has tended to drive up pay in practice rather than restrain it."

Cridland added that the 50% threshold meant companies would not be "at the mercy of activist minorities".

The proposals - likely to pass into law in October next year as part of the Enterprise and Regulatory Reform Bill - will also see any company that fails to achieve a majority during the vote on remuneration put its overall pay policy up for a binding vote the next year.

The NAPF's Paterson added that the reforms should bring about a "much-needed cultural change".

"They present a challenge to companies and investors, as there will be a need for better communication by both," he said.

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