Vince Cable: further UK government action "inevitable" if companies do not crack down on executive pay

Out-Law News | 24 Apr 2014 | 11:21 am | 2 min. read

The UK government will "inevitably" come under pressure to introduce further legal restrictions on executive pay if companies are not careful to observe "the spirit, as well as the letter" of the new reporting regime, the business secretary has warned.

In a letter to the chairs of remuneration committees at the FTSE 100 leading companies by share value, Vince Cable said that companies had been given "an opportunity ... to make peace with the public" on executive pay. Reforms introduced in October introduced new reporting requirements for companies to improve transparency over pay, and gave shareholders a binding vote on future pay policy at least once every three years.

"A lot of trust was lost due to extremes of what happened before 2010 when pay accelerated massively, unrelated often to the performance of the company," Cable said in his letter, extracts from which were published in the Financial Times. "This is particularly true in the banking sector, where pay reached dangerous levels."

"Concerns have been raised that some companies are not observing the spirit, as well as the letter, of the new reporting regulations. And there are signs that some companies continue to consider pay awards which appear excessive in light of recent performance ... You will be conscious that this issue continues to be the focus of considerable public debate. Unless business is seen to act responsibly, pressure for further action will inevitably result," he said.

Many leading private sector companies have either recently held or are preparing to hold their first annual general meetings (AGMs) since the new rules were introduced. This is also the first year that banks will be forced to comply with a new EU-level cap on bankers' bonuses, limiting these to 100% of salary or 200% with shareholder approval. This cap, which is currently being challenged by the UK government at the Court of Justice of the European Union (CJEU), will apply to bonuses paid from the start of 2015 reflecting performance in 2014.

Company shareholders were given a legally-binding vote on executive pay from 1 October 2013 in respect of companies whose accounting period ended on 30 September. At the same time, new remuneration reporting requirements were also introduced. Annual reports must now contain more information about how directors have been and will be paid, along with information about how this relates to company performance. The reporting requirements are intended to assist shareholders in deciding whether to approve the company's pay policy.

Cable first expressed his concerns that remuneration committees were ignoring the spirit of the reforms in a speech addressed to a number of leading businesses last month. At the time, he said that the government could take "stronger measures" if businesses failed to comply, according to the Guardian. Options trailed by the Business Secretary during his speech included stricter regulatory oversight of pay reports on policies, new requirements for shareholders to disclose how they had voted on pay and a requirement to consult employees.

The European Commission proposed new corporate governance rules earlier this month, to include for the first time shareholder 'say on pay' requirements at EU level. The Commission's proposals would require companies to set out a maximum level for executive pay in a remuneration policy document which would be subject to a binding shareholder vote. They would also be required to explain the ratio between average employee pay and executive pay as part of the remuneration policy, and to set out how pay measures benefit the long-term interests and sustainability of the company.