Cable proposes overhaul of executive pay

Business secretary Vince Cable has outlined plans to overhaul executive pay, and has suggested giving more power to shareholders to veto pay decisions.

Speaking at the Liberal Democrat autumn conference in Birmingham, Cable launched a consultation on the issue, and said that he wanted to address the problem of executive pay rising while share prices flatlined.

He also called for greater transparency in executive pay, suggesting that all directors of firms listed on the London Stock Exchange should be required to reveal the total value of their salary, pensions, share schemes and bonuses.

In addition, Cable’s called for remuneration committees to explain in annual company reports why they have paid bonuses that are not justified by performance, or are out of line with their pay policy.

Another of Cable’s proposals is for employees to have a say on executive pay by sitting on remuneration committees. However, Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development, said that this was likely to be difficult to implement. He said: “Having employees on a remuneration committee is one thing, but how will they be appointed? What are their backgrounds and how will they make informed decisions – perhaps training will be required. It could also be perceived as a career-limiting move if you’re the one putting barriers in the way of executives’ pay deals.”

Cotton also suggested that there might be a general lack of willingness among shareholders to withhold executive pay deals. He said: “It depends on whether shareholders want to impact on pay. At the moment we haven’t seen many votes against remuneration awards. His might be because it’s believed that executives are worth the remuneration. There simply might not be much appetite to vote against remuneration awards.”

Cotton suggested that it might be more practical for shareholders to become involved before pay deals are agreed upon executives’ appointment. He said: “It may be the case that before executives are appointed, packages are agreed in advance rather than afterwards. Then organisations might have to explain why executives are being paid what they are, measured against the complexity, market conditions and other elements affecting the organisation.”

Cotton added that Cable’s proposed move towards transparency in relation to executive pay would not work on its own, and that it needed to be accompanied by robust governance procedures in order to work. Cotton pointed out that there has been increased transparency in pay for the past decade, yet executive pay has gone up by an average of 400% in that time.

Cotton’s views were echoed by Sean O’Hare, reward partner at PricewaterhouseCoopers, who said: “The good news is that the Government has chosen to consult widely on the issue, rather than rushing to new regulation. Non-executive directors and shareholders will welcome this document if it is the first step towards providing closure on this issue for a period of years. However, it is hard to see that the proposals as they stand will achieve much. In reality shareholders already have the tools they need to influence the pay decisions of remuneration committees if that is what they really want to do.

“As such the proposals, if implemented, could place a huge administrative and cost burden on businesses with limited benefit. The worst outcome would be increased time spent by management and remuneration committees navigating a new set of governance rules at the expense of spending quality time considering pay decisions,” O’Hare added.

Cable’s proposals received a measured response from the Institute of Directors, with director-general Miles Templeman warning that executive pay should not become a “politicised” subject. He said: “We agree that it is right that the pay of business leaders is aligned to business performance. Indeed, there may well be some practical improvements that can be made to the way pay levels are set in big companies by improving the performance of remuneration committees.

“However, it is important that ministers do not politicise a subject that is best approached in a cool, dispassionate way. The Business Secretary should be using all his keynote speeches to promote the competitiveness of British business, rather than dwelling for political reasons on executive pay.”

XpertHR has more information on the consultation and what it means for companies.

Find more information on pay and benefits, including pay data by sector, on XpertHR.

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