Executive remuneration: Government proposals for reform

Government seeks to restrain directors’ pay that rises “virtually every year…regardless of performance”

The Department for Business, Skills and Innovation (BIS) today published a discussion paper on “Executive remuneration” (the Paper). The Paper can be read here.

The Paper seeks to address “concens about executive pay”, the “recent financial crisis [having] made shareholders, the public and Government more acutely aware of the issue and more critical of perverse incentives or excessive levels of reward”. The Paper sets out BIS’s proposals for remuneration to be “used effectively to attract, incentivise and appropriately reward executives, so that the value of the companies…increases over time.” At present, the Paper argues, the

“general disconnect between pay and long-term performance suggests that there is something dysfunctional about the market in executive pay or a failure in corporate governance arrangements”.

The Paper’s proposals are directed principally at quoted companies, meaning companies with a listing on the Main Market of London Stock Exchange and in particular those companies with a “premium listing” which must comply or explain with the UK Corporate Governance Code.

Published together with the Paper and related to it, BIS has also today launched a consultation paper on narrative reporting, which makes proposals on the reporting of executive remuneration and which we discuss in this post.

Summary of the Paper’s questions

Amongst the questions that the Paper poses for discussions are:

Role of shareholders –

• Would a binding vote (as opposed to the current advisory vote) improve shareholders’ ability to “hold companies to account” on pay and performance?
• Should shareholder representatives be included on nomination committees?

Remuneration committees –

• Should companies be required to include employee representatives on remuneration committees?
• What would be the costs and benefits of an employee vote on remuneration proposals?
• Should the use of remuneration consultants be made more transparent; or is there a need for regulation in this area?

Structure of remuneration –

• Could the link between pay and performance be strengthened by companies choosing more appropriate measures of performance?
• Should companies be encouraged to defer a larger proportion of pay over more than three years?
• Should companies reduce the frequency with which long-term incentive plans are reviewed?
• Would “radically simpler” remuneration models that rely on directors’ level of share ownership more effectively align the interest of shareholders and directors?
• Are there other ways that bonuses, LTIPs, share options and pension could be simplified?
• Should all UK quoted companies be required to put in place claw-back mechanisms?

Responses to the Paper are invited by 25 November 2011.

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