Government consults on plans to give company shareholders greater influence over executive pay

The new consultation (39-page / 194KB PDF), by the Department for Business, Innovation and Skills (BIS), also calls on companies to provide an annual report setting out how they have responded to shareholder concerns around their remuneration policies.

"I have no problem with business celebrating success and rewarding talent, but I have heard frustration from all circles that directors' pay goes up when times are good, and yet it still goes up when performance is poor. I want shareholders to feel empowered to prevent rewards for mediocrity or failure," Business Secretary Vince Cable said.

The proposals are part of a range of measures set out by Cable earlier this year to address growing concerns about rising executive pay levels which are not linked to performance from business leaders, investors and the public. The Government will confirm the precise measures it intends to take forward through primary legislation later this year, however it aims to have the measures in place for general meetings due to take place after 1 October 2013.

Cable said it was "appropriate" to put more information and power into the hands of shareholders, including an annual binding vote on future remuneration policy and an advisory vote on how that policy is implemented. The consultation also proposes giving shareholders a binding vote on exit payments worth more than one year's salary. Shareholders have had an advisory vote on directors' remuneration since 2003, however "not all companies are responding adequately to shareholder concerns", according to the consultation.

Following the proposed changes, companies will have to set out their proposed pay policy for the year ahead at the start of the year – including potential payouts and a note of performance measures that will be used. Any changes from the previous year's policy will have to be approved by shareholders before they can take effect. Directors' contracts, including existing contracts, will need to be consistent with this requirement.

In the event that shareholders do not agree on a new remuneration policy the company will have to "fall back on the last policy to be approved or hold a further general meeting" so that shareholders can vote on revised proposals, according to the consultation.

The consultation also proposes a higher threshold than the current majority for shareholder votes on remuneration decisions, perhaps as high as 75%. However, it acknowledges that this move would require "more complex legislative changes".

A new binding vote on any exit payment for a director whose contract has been "terminated early and without due notice" would apply where that payment exceeds the equivalent of one year of that director's salary. This would "give shareholders a real say over payments for failure" and potentially reduce drawn-out negotiations between companies and departing directors, the consultation said.

Corporate law expert Martin Webster with Pinsent Masons, the law firm behind Out-Law.com, expressed his concerns that future remuneration policy could need an enhanced voting threshold in order to be approved.

"An enhanced vote in favour of 65% or 75% instead of a simple majority carries risks by giving a minority entrenched powers. Once the precedent is set, what other areas of policy might be subject to a veto by a minority?" he said.

"I am sceptical that these proposals will bring about significant change on questions of boardroom pay. Shareholders already have various opportunities of making their views known, including once a year voting against the remuneration committee chair, but it is for them to decide whether to use their powers or not," he added.

The proposals have also been criticised by employers' body the CBI, which warned that they risked turning shareholders into "micro-managers" and would make day-to-day business management difficult.

"Businesses do not believe binding shareholder votes are the right way to ensure that executive reward reflects performance... [However] the Government has rightly acknowledged that any binding shareholder vote should ideally be aimed at an organisation's general remuneration policy, rather than specific directors' pay packages," he said.

Echoing Webster's comments, he added that the potential 75% approval threshold would be "damaging, leaving decision making about company strategy in the hands of a minority of shareholders who may not represent the wider group".

In a speech in January, Cable said that further measures due to be introduced to combat spiralling executive pay would include more transparent remuneration reports and increasing the diversity of company boards and remuneration committees. Companies will be forced to publish a single figure for executives' pay deals and will have to explain how those figures were reached by reference to performance. Boards will also have to outline how executive pay compares to other payouts such as dividends, although they will not have to indicate how executive salaries compare to those of ordinary employees.