The Government’s plans for an overhaul of the executive pay system have been announced.
The proposals were first outlined in September 2011 by business secretary Vince Cable and more detail has been provided in a speech given to MPs.
Speaking in Parliament, Cable said: “It’s not Government’s role to micro-manage company pay but there are things we can do to address what is clearly a market failure.
“The evidence is clear that business and investors realise there is a disconnect between top pay and company performance and that something must be done.”
Cable outlined a series of measures aimed at improving a flawed system that he highlighted as resulting in executive pay rising at five times the rate of average workers’ pay during 2011. He also stressed that action should be taken in light of the fact that CEO pay has risen at an average of 13% per year while the performance of the FTSE index has languished behind.
The measures focus on four key areas: greater transparency; increased shareholder power; more diverse boards and remuneration committees; and best practice led by the business and investor community.
Cable has called for company pay reports to be made clearer and more detailed, with information outlining how pay decisions have been reached and how future pay policy has been set out. Businesses will also be required to explain how they have consulted with employees when making pay decisions and be expected to provide evidence of how executive pay is related to business performance.
In addition, there will be a review of what level of shareholder support is required in order for pay proposals to be accepted. Cable suggested that there might be a threshold of 75% agreement required for a vote to be considered successful.
Cable added that he wanted to see more diverse remuneration committees, which in turn would help to achieve greater boardroom diversity as a whole. He also said that the Government would be looking further at the fact that a number of remuneration committee members are executives of other FTSE companies, which results in a situation where individuals have an interest in “maintaining the status quo in pay-setting culture and pay levels”.
The Government will now work with businesses and investor groups to agree on the best way to implement the proposals.
Cable’s proposals were welcomed by John Cridland, CBI director-general, who said: “We have been clear that executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance. Millions for mediocrity does a disservice to the reputations of hard-working businesses.
“The CBI strongly supports measures to reduce, withhold, or in exceptional circumstances claw back executive pay as it sends a powerful message to future executives. And it is right that remuneration committees should take into account the organisation’s broader pay strategy when setting executive pay.”