UK floats binding vote on pay

Sep 20, 2011
<p>Business secretary outlines proposals for pay and narrative reporting in two consultation papers launched yesterday</p>

UK companies could face a binding vote on executive compensation under new proposals outlined by the government yesterday.

Vince Cable, the UK business secretary, has launched a consultation paper on executive pay that questions whether the non-binding votes companies currently undertake are a strong enough incentive to link pay and performance.

The paper, which is open for responses until November 25, states some shareholders believe a binding vote would encourage shareholders to be more active and prompt companies to take the issue more seriously.

‘If introducing a binding vote, its legal status would need to be established, including what expectations this would place on a company to revise its remuneration proposals in the event of a vote against, and whether revised proposals would then need to be verified by a second shareholder vote,’ states the paper.

The consultation document also acknowledges, however, that many shareholders and other stakeholders view a binding vote as a bad idea.

Critics argue it would be costly and inconvenient, could run into legal problems and is unnecessary as shareholders that want to take concrete action can already vote against the chair of the remuneration committee.

The Netherlands, Norway and Sweden have all adopted a binding vote on remuneration but the majority of countries that mandate a vote on pay call for a non-binding poll only.

The proposal is part of a wide range of ideas set out by Cable in two consultation papers covering executive pay and narrative reporting. They will run alongside a review into the UK equity markets launched last week, also at the behest of Cable.

On the topic of pay, the government is also looking at questions including whether it should make remuneration committees more diverse, and whether the ratio between the CEO’s pay and median earnings in a company should be published.

The main proposal for narrative reporting is to split the existing narrative report into two documents:
a ‘strategic report’ for shareholders, including information on results, strategy, risks, pay and social and environmental issues
an ‘annual director’s statement’, containing information underpinning the strategic report, which would be published online.

In a move that will be welcomed by the UK’s IR community, Cable says part of the aim of his proposals on reporting is to streamline bloated annual reports.

‘The average length of an annual report is now almost 100 pages, even longer for FTSE 100 companies,’ he notes in a statement. ‘It has become unwieldy, complex and hard to understand, so investors cannot easily find the information they need.

‘Changing the way companies do their annual reports will provide investors with better information on how well businesses are performing and what their directors are being paid, increase transparency and reduce the burden on businesses, freeing them up to concentrate on growing and focusing on the long term.’

Click here to access the website of the UK’s Central Office of Information, where you can download both consultation papers.

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