LONDON (Reuters) - Britain will set out plans next week to crack down on executive pay to try to address public outrage over huge wages for "fat cats" at a time of deep public spending cuts and fears of a looming recession.
Prime Minister David Cameron said a market failure during years of uncontrolled "turbo capitalism" had broken the link between risk and reward, giving some executives generous pay deals despite lacklustre performance.
Politicians from all parties have fought to take the lead in the pay reforms as Britons feel the pain from a government austerity drive, unemployment at a 17-year high and below-inflation wage rises for most workers.
Top UK directors' total pay soared by almost 50 percent last year, despite an economic slowdown and only moderate growth at leading companies, according to research by Incomes Data Services, part of Thomson Reuters.
"There should be a proper, functioning market for talent at the top of business," said Cameron, who leads the centre-right Conservatives, the dominant partner in Britain's coalition government. "We need to make the market work and we will do that by empowering shareholders and using the power of transparency."
Anger over pay, especially in the financial sector, grew during the 2007-08 credit crisis when Britain nationalised Northern Rock bank and pumped 66 billion pounds into Lloyds and Royal Bank of Scotland.
Protesters inspired by the Occupy Wall Street demonstrations in New York are still camped outside St Paul's Cathedral in the City of London financial district, more than three months after they first pitched their tents. They are campaigning against social inequality and corporate greed.
The centre-left opposition Labour Party, which lost power after 13 years in 2010, has accused the Conservatives of talking tough on pay, but failing to act.
Describing the issue as one of the main battlegrounds in British politics, Labour leader Ed Miliband said: "I frankly don't believe that this prime minister is serious about this agenda."
The government's plans are due out on Tuesday, a day before official data are expected to show Britain's gross domestic product contracted by 0.1 percent at the end of last year.
The measures are likely to include new powers for shareholders to hold binding rather than advisory votes on directors' wages.
Cameron has talked of stopping the "merry-go-round" of executives sitting on each other's remuneration panels, awarding themselves big pay deals even when their company has struggled.
The prime minister has refused to rule out new laws forcing companies to put a workers' representative on pay boards, although such a move is seen as unlikely. Under existing laws, the staff representative would have to become a director to sit on the pay board.
A government official said final details were still being decided. The proposals were likely to focus on plans for greater transparency, requiring shareholders to approve remuneration packages and increasing the diversity of the membership of company boards, the official added.
Deputy Prime Minister Nick Clegg, of the Liberal Democrats, centrist junior coalition partner, said bosses' pay should be outlined more clearly in annual reports, "so that investors don't need an accountancy degree to decipher them".
The Institute of Directors, a lobby group with 43,000 members, said bosses' pay rises were unsustainable, but it favoured having a broader mix of non-executive directors on company boards rather than giving shareholders a binding vote on pay.
"Once a remuneration award has been announced by a board, it is too late for shareholders to intervene with an absolute veto," it said in its response to the government proposals.
A Reuters poll of 10 UK-based fund managers earlier this month showed most think the new measures are flawed. Eight out of 10 said giving shareholders a vote on executive pay would not work.
Editing by Jane Merriman