Reforming executive pay - Government proposals and investor concern
There have been a number of recent developments with regard to executive pay. These are summarised below.
Department of Business Innovation and Skills
In September 2011 the Department of Business Innovation and Skills (“BIS”) published 2 documents relating to executive remuneration. These documents were i), a discussion paper on the governance of executive remuneration in quoted companies and ii), a further consultation paper on the future of narrative reporting.
The discussion paper on the governance of executive remuneration included a number of measures aimed at the following:
- Improving transparency
- Increasing the role of shareholders, for example by making their vote to approve executive pay binding
- Strengthening remuneration committees
- Simplifying/improving the remuneration structure to provide effective shareholder oversight and stronger links to performance.
The discussion paper includes a number of ideas which are likely to be difficult to put into practice. For example, appointing independent members, who are not full non-executive board members, to remuneration committees may lead to problems with regard to agreeing their duties and liabilities. However, the government appears to be aware of these potential issues and has not to date committed to bringing any of them into force.
The consultation paper on the future of narrative reporting covers a variety of topics including requirements to provide key information on executive remuneration. The proposals include requirements to provide the following:
- A single figure summarising total remuneration for each director
- Improved disclosure of the relationship between executive pay and performance
- Details of the company’s proposed remuneration policy for the year ahead, including estimates of total directors’ remuneration if performance targets are exceeded, achieved or not achieved.
While it is not known at this time which of the proposed changes set out in this consultation paper will be enacted it is thought that many will become law.
Government consultation on banking
The government launched a consultation on draft regulations for executive remuneration disclosure for the largest UK banks and the UK operations of large non-EEA banks. (The government has estimated that 15 banks will be subject to these regulations). These proposals include:
- New disclosure obligations to apply to the relevant banks
- An obligation on the relevant banks to produce a detailed report disclosing details of the remuneration of their 8 highest paid senior executives, on an unnamed basis
- An obligation to produce and file an annual remuneration report, with the first remuneration report to be filed no later than 31 December 2012.
- Criminal sanctions to be imposed on directors for non-compliance.
The consultation closes on 14 February 2012. This means that if the draft regulations are enacted later this year, as expected, then there may only be a short time between enactment and the date the banks are required to produce their first remuneration report.
Association of British Insurers – letter to UK banks
The Association of British Insurers (“ABI”) wrote to all UK listed banks to outline their concerns with regard to remuneration in the banking sector. (A link to this letter is included in the ‘Resources’ section below.)
The ABI’s opinion is that remuneration committees should not exercise their discretion to increase bonus/incentive payments due to reduced profitability in the banking sector. The ABI’s letter also recommends that as share prices have been falling all new share grants based on a multiple of salary should be reduced so as to avoid windfall gains.
While there have been a number of consultations and proposed changes regarding executive remuneration it has not yet been confirmed that any of them will become law.
However, the common theme arising from the above consultations is that executive remuneration will continue to remain in the spotlight and be a source of continuing controversy.