UK Prime Minister Theresa May has published plans for annual binding votes on executive pay that may apply only to some elements of pay and only at some companies, in what has been seen as the latest watering down of her proposed corporate governance reforms.
The recently published government green paper, Corporate governance reform, sets out the government’s options to address a situation where FTSE 100 bosses can be paid more than 120 times the wage of a typical employee.
In July, just after she became prime minister, May revealed there should be binding annual votes on executive pay as part of her attempt to encourage responsible business.
Under the current system, quoted companies have to subject their pay policy to a binding vote every three years. But the new green paper has made clear that any annual binding vote may not now be universal.
The document says that the binding vote could apply to the full remuneration report or apply to the ‘variable pay elements’ such as the bonus, long-term incentive plan and any pay rise, and not the actual salary.
Also, the policy might only be applied to companies that had encountered ‘significant minority opposition’ to pay awards in the previous year or two, or to companies that had lost their existing annual advisory vote.
‘It could be applied annually to all companies or only to companies that have encountered significant shareholder opposition to the remuneration report,’ the paper says.
Under another option, companies could set an upper threshold for total annual pay and then only have binding annual votes when pay exceeded that limit. Alternatively, they might be allowed to bring forward the current three-yearly vote in special circumstances.
The CBI, the British business-lobbying group, said it welcomed the ‘targeted’ use of binding votes on pay.
Josh Hardie, CBI deputy director-general, says: ‘Businesses shouldn’t award exceptional pay for poor performance and shareholders have a key role in ensuring sensible, sustainable and reasonable pay-setting policies. Introducing a targeted binding vote regime would focus attention on the most concerning cases and give shareholders the teeth to truly have the final say on top executives’ pay.’
Another element of the green paper was a requirement to publish pay ratios between executives and workers on the shop floor. Even then, the document conceded that any new reporting measure would have to be designed carefully given that a ‘simple ratio’ of chief executive pay to the median salary could produce ‘misleading results’ which could be ‘misunderstood’ or ‘misconstrued’.
The UK’s corporate governance code is voluntary and is administered by the Financial Reporting Council.
New research by Grant Thornton highlighted that more than a third of big listed companies failed to meet its requirements. While nearly three-quarters of FTSE 100 companies — 72 percent — comply fully, only 57 percent of the FTSE 250 do.
Simon Lowe, partner at Grant Thornton, says: ‘More companies are recognizing the commercial imperative of maintaining effective governance practices, yet there remains substantial room for improvement as a large proportion still opt for the bare minimum, complying only with the rules but not fully embracing the principles of the code.’
