New reforms aimed at increasing the transparency of directors’ pay for shareholders have come into force.
A pay policy put in place by the government is set to allow shareholders of UK quoted companies better hold companies to account on the issue of directors’ pay.
New powers mean that stakeholders will have access to ‘clearer information’ on the remuneration of executives and will reserve the right to exercise a new legally-binding vote.
All payments, the legislation states, must be covered by the policy. Pay information must now be presented in a more understandable format, with improved disclosure on performance conditions used to assess variable pay of directors.
Business secretary Vince Cable comments, ‘Over the last decade the pay of our top executives has quadrupled but it has not always been an indication of how well a particular company has performed.
‘Our reforms mean shareholders will now no longer be kept in the dark. They now have powerful tools for every shareholder – big or small – to speak up and challenge companies over excessive pay and prevent big bosses being rewarded for failure.’
Going forward, all listed firms’ pay policy (which will then have to be kept for three years) will be subject to the approval of more than 50 per cent of shareholders. To simplify details for backers, a single figure will have to be published annually outlining how much executives have been paid.
In line with the government’s pledge to cut down on red tape and administration for businesses, the new changes will be offset by the removal of some existing requirements.
Information on Directors’ Pay on AIM reports:
Barbara Allen, head of employee incentives at Stephenson Harwood, questions whether the increased transparency will encourage more effective engagement between companies and investors.
‘Will it simply become another box ticking exercise?’ she questions.
‘Time will tell whether institutional investors will use the binding shareholder vote, as intended, to register their opposition against remuneration policies they do not support.’
News of the changes in pay policy come at the same time that Incomes Data Services finds that the average earnings of directors of companies listed on the Alternative Investment Market rose by nearly 12 per cent in the last year.
While median total earnings climbed 5 per cent and salaries 3.6 per cent, those for small companies increased by 4.9 per cent on average.
Daniel Bellau, corporate partner at Hamlins, comments, ‘The law currently only applies to listed companies, yet it will be interesting to see whether this change has a knock-on effect in driving a more transparent culture around remuneration in AIM-listed and smaller corporates too.’