The U.K. Considers Binding Say-on-Pay Votes

In the run up to the publication of a consultation on executive pay by the U.K. government, politicians are focusing on the role of shareholders in reining in "excessive" pay and avoiding reward for failure.

Amid the growing public anger over what Prime Minister David Cameron described as a "market failure," whereby levels of executive pay have become dislocated and misaligned with company performance, a consensus has grown among politicians on all sides that legislative action is required. However, rather than hard-coding into law how executive directors should be paid, the centre-right coalition government has focused on further empowering shareholders to hold companies to account.

It is proposed that this would happen on two fronts: requiring greater transparency surrounding pay figures, particularly for below-board senior executives, as well as making shareholder votes on a company's pay policies legally binding. This may include separate approval of severance packages, as well as the remuneration report. For nearly a decade, shareholders have had a non-binding say-on-pay vote at U.K. companies, meaning that companies have no legal obligation to act on any dissent by shareholders.

However, the practicalities surrounding the introduction of a binding vote remain unclear. First, there is the question of what happens if a binding vote is lost, given the legal complications in reversing contractual arrangements with individual directors. Second, there is the fact that less than two dozen remuneration report votes have been lost at FTSE AllShare companies since say-on-pay was first introduced, implying that shareholders rarely defeat these resolutions even on a non-binding basis.

"The Government's thinking around a binding vote is interesting but we need more detail on how it would work before we could give it our support," said David Paterson, head of corporate governance at the National Association of Pension Funds (NAPF). "Shareholders already have a non-binding vote on pay policy, and it is very rare for a board to lose that vote. Greater transparency on performance goals and tougher standards in setting them would be more effective in controlling boardroom pay."

Other ideas that have been floated include allowing employee representatives to sit on remuneration committees, as seen in other European countries, and forcing executives to receive more of their remuneration packages in shares rather than cash. However, these ideas have not received the same level of endorsement by senior government figures and investor bodies.

The publication of the consultation findings, as well as final recommendations, is currently scheduled for the end of January.

This article originally appeared in ISS' Governance Weekly newsletter. ISS' Governance Exchange is hosting a webinar on Jan. 31 at 2:30 p.m. GMT (9:30 EST) to explore the state of boardroom pay in the U.K. Panelists will detail trends in remuneration, proposals to make say-on-pay votes binding in the U.K., as well as provide perspectives on the U.K. government's consultation on executive remuneration. Please click here to register. To learn more about the benefits of joining Governance Exchange, please click here.

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