Investors welcome binding shareholder votes on executive pay

News that the government plans to bring in a binding shareholder vote on executive remuneration on a triennial basis has been welcomed by two key investment trade bodies.

The move by business secretary Vince Cable came after the so-called “shareholder spring” which saw a wave of votes against executive remuneration policies at high-profile corporates including Aviva, WPP and Barclays, among others. The National Association of Pension Funds (NAPF) head of corporate governance, David Paterson, said that shareholders have become concerned that boardroom pay is being ratcheted up and a binding vote could help put the brakes on executive renumeration. Paterson said: “This is an opportunity for everyone to rethink pay policies and to aim for restraint, simplicity and transparency. The goal must be to better link pay and performance, so that it can be explained and justified.”

The three-year binding vote will include exit pay, or “golden goodbyes” which can provide executives with substantial pay-offs in cash, shares and pension rights. Paterson commented: “A single figure which shows what top executives took home will help shareholders hold boardroom pay up to the light. Part of the problem is that deals have become increasingly complex. A headline number will focus minds and allow for clearer comparisons to be made between companies.”

For the Investment Management Association (IMA), which represents the fund management industry, IMA director of corporate governance, Liz Murrall, commented: “Shareholders do need to have more tools at their disposal to be able to deal with executive pay issues. IMA is in favour of a binding vote and we are pleased to see that the proposals provide more flexibility as to the frequency of the vote. Institutional shareholders will now have to rise to the challenge of ensuring that pay policies are meaningful.”

A note of caution was sounded by consultants Mercer, which otherwise also welcomed the proposals. Mercer UK head of human capital business Christopher Johnson said: “We are concerned that the new requirements may restrict companies’ ability to adapt their reward offerings to reflect changing business environments and markets for talent. However, a triennial binding vote should encourage companies to adopt a longer-term and transparent approach to their executives’ pay.” Johnson added: “We support the Government’s move to encourage greater dialogue on executive remuneration between companies and their shareholders.” He went on to say: “Current levels and approaches to executive pay reflect a market failure. We understand the government’s focus on investor responsibilities, but we believe that board effectiveness is equally important and would like to see the Government and companies put a greater focus on this area.”