(March 14, 2012) — Shareholders could dictate the level of executive pay at some of the world’s largest companies, as the United Kingdom Government launches a consultation on how to better link remuneration with performance.
The Department for Business, Innovation and Skills (BIS) today announced it had launched a consultation to garner thoughts on proposals to realign pay with performance of businesses listed in the UK.
The outcome of this consultation could hit global companies as a large number of firms that operate in and draw significant revenue and business from around the world are listed on the London Stock Exchange. These companies are drawn to the UK due to its high governance standards and prominence to many large investors.
Last year, some 40% of companies listed on the Alternative Investment Market, London’s platform for small, growing companies, drew revenue from and operated outside the UK.
The smaller market followed the trend occurring on the main exchange, which is home to several large companies that have offices in the UK, but operate in and draw revenue from elsewhere.
Examples include resource giants Glencore, which is headquartered in Switzerland and operates across the commodities-rich nations in Africa and Asia, and Rio Tinto, which has offices in London, but draws the majority of its revenue from around the world.
The BIS consultation sets out a range of measures including: An annual binding vote on future remuneration policy; Increasing the level of support required on votes on future remuneration policy; An annual advisory vote on how pay policy was implemented in the previous year; A binding vote on exit payments of more than one year’s salary.
Companies will have to report each year on how they have responded to shareholder demands.
Vince Cable, Business Secretary, said: “I want shareholders to feel empowered to prevent rewards for mediocrity or failure.
“I have no problem with business celebrating success and rewarding talent, but I have heard frustration from all circles that director’s pay goes up when times are good, and yet it still goes up when performance is poor.”
Cable said good corporate governance was vital to creating the right environment for long-term, sustainable growth. He added that shareholders were at the heart of the UK corporate governance framework, so it was appropriate that more information and power was put in their hands.
Shareholders stood accused by some of failing to tackle excessive pay and risk-taking in the financial sector before its near collapse. Since, there has been a growing movement among shareholders to get binding votes on pay, and other important business factors.
These measures will require primary legislation, BIS said, and the purpose of the consultation is to seek evidence on their potential costs and benefits, and the likely impact on business.
The proposals are part of a wider package of measures announced by Cable in January, aimed at addressing corporate governance failures in the way executive pay is set in UK publicly quoted companies.
Responses should be sent to executive.pay@bis.gsi.gov.uk by April 27, 2012, at which point the government will present how it intends to proceed.