LONDON (Reuters) - Britain will legislate to give shareholders the power to reject company director pay deals in a bid to tie the link to performance and calm public anger over soaring executive earnings, Business Secretary Vince Cable said on Wednesday.
The move puts the country in the vanguard of a clampdown on corporate pay that has seen investors voicing their disapproval at FTSE 100 boardroom levels which have quadrupled over the past decade, far exceeding the performance of share values.
The plans will strengthen the hand of shareholders who currently only have an advisory and non-binding vote on directors’ remuneration.
“At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 percent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen,” Cable said.
The move follows measures to limit the level of banker’s bonuses following the financial crisis and comes as the European Union considers similar proposals to boost shareholder control over director pay.
Pay increases for top executives in the United States have also slowed in response to shareholder pressure, although they still gained by 14 percent in 2011.
Industry groups cautioned against further restrictions on top earnings and stressed that pay levels should be a matter for companies, not government.
“High pay for success is perfectly acceptable, it is high pay for failure that needs to be addressed,” said Mark Boleat, Policy Chairman at the City of London Corporation, which promotes the capital’s financial sector.
Public anger over generous pay at the top of companies helped spur the anti-establishment “Occupy” movement which launched protests around the world including in London and New York’s financial districts.
Cable said companies listed publicly in Britain would have to seek the approval of shareholders to award compensation packages to directors in an annual vote, under laws that could come into force as early as 2013.
Companies will be able to limit the shareholders’ vote on pay to once every three years, provided they make no change in compensation arrangements for directors.
The opposition Labour party accused Cable of making a “U-turn” on the binding votes, which he had originally proposed should be held every year.
Cable rejected the criticism, saying the potential extension to a vote every three years would encourage companies to stick to a clear and long-term pay strategy, putting a brake on what he called an “annual upward pay ratchet.”
Shareholders, led by insurers and large pension funds, have become increasingly critical of what they regard as overgenerous pay for senior executives, especially where corporate performance has been disappointing.
In recent months investors have unleashed a wave of negative votes over pay that have been dubbed Britain’s “Shareholder Spring” in a backlash that has cost the jobs of executives as Aviva (AV.L) boss Andrew Moss, and Sly Bailey, head of newspaper group Trinity Mirror (TNI.L).
Last week investors in the world’s biggest advertising agency WPP rejected Chief Executive Martin Sorrell’s 6.8 million pounds pay award. The company says it will now consult with shareholders over their concerns.
The investment community broadly welcomed Wednesday’s announcement, with the Association of British Insurers saying the plans were “practical, workable and should help tackle excessive executive pay”.
The government has said for some months it planned to boost shareholder’s sway over compensation, but had held back publication while it consulted with industry and investors over the measures.
The new binding vote will also cover the level of potential exit payments - frequently criticised as “rewards for failure” - and shareholders will in addition have a second, non-binding, vote in judgement on the levels of past remuneration.
If a company fails the advisory vote on past pay, it will have to resubmit its overall compensation policy to shareholders in their binding vote the following year.
Companies will also have to publish a single figure of remuneration for each director, so that investors do not have to search annual reports to calculate total rewards, and publish a chart comparing chief executive pay and company performance.
However, Cable dropped plans requiring companies to win a majority beyond 50 percent -- perhaps as high as 75 percent -- to get their future remuneration plans accepted, saying it had proved legally complicated and could give minority shareholders disproportionate influence.
The Confederation of British Industry backed the change, saying that otherwise boardrooms would have been “at the mercy of activist minorities.”
But shareholder advisory service Pirc, whose clients manage an aggregated 1.5 trillion pounds in assets, questioned the effectiveness of a simple 50 percent majority and urged investors to make full use of their powers in regular, transparent voting.
“If shareholder voting continues in line with recent behaviour this means it will remain the case that only a small minority of companies will actually lose a binding pay vote,” Pirc said in a statement.
Reporting by Tim Castle; Editing by Hans-Juergen Peters and Jon Loades-Carter