Business Secretary Vince Cable has stated that shareholders should have a bigger say on executive pay to ensure there are “no rewards for failure”.
Mr Cable has said there is a “real problem” with pay rising while share prices stay flat or actually declined.
He said he did not want “state control of pay”, but was “well-disposed” to shareholders having a veto. “People accept capitalism but they want responsible capitalism”.
He has also set out proposals aimed at reining in multi-million-pound packages, including requiring companies to set out the criteria used to determine pay and perks. These include putting employee representatives on remuneration committees.
Mr Cable has gone on to say his big regret this year was not securing tighter controls on bank pay and bonuses, allowing the message to go out that unrestrained greed is acceptable.
400% Increase
“Executive pay has increased by over 400% over the last decade at a time when share prices haven’t increased at all and basic pay of most employees hasn’t increased at all. “There is a real problem here and what we’re looking at in this proposed discussion paper is different ways in which shareholders can have a more effective voice.” “What I want to see is rewards for success not rewards for failure. “We don’t want to go down the direction of state control of pay, that’s completely wrong. What we do want to see is shareholders being more active in exercising discipline over the companies they own.”
Mr Cable is in favour of shareholders being able to block pay awards they felt were unreasonable, but discussions were needed with the business community before any such move was implemented.
Mr Cable’s Department for Business, Innovation and Skills will publish a discussion paper on the proposals in October.
Pay Reporting
Changes to the reporting requirements for all stock exchange-quoted companies are due to come into force in October 2012, following a three-month consultation. At present, the details of each executive board member’s salary, pension, bonuses, and shareholdings are recorded but in separate parts of the annual report.
Under the new system they will be brought together in one table – with a total figure given to shareholders for the first time.
An explanation of how the package was arrived at will also have to be included, as well as projections of the minimum and maximum each executive could expect the next year.
Pay Rises Since 1998
The median total remuneration for FTSE 100 chief executives had risen from £1m a year in 1998 to £4.2m a year in 2010.
Pension Holders
Anyone with a pension also has a vested interest, not just in the actual pay rewards, but in the performance of chief executives. Executives should receive outstanding pay for outstanding performance. However, simply being the chief executive does not entitle a person to outstanding rewards.
UBS
UBS is a much more extreme example, chief executive Oswald Gruebel has stated that he will not resign, despite £1.5 billion in losses caused by fraudulent trader Kweku Adoboli. If Mr Gruebel does not see his ultimate responsibility for this, is he entitled to his generous pay?
Even though UBS is a Swiss bank, British pension funds and pension holders have investments in it.
Class Action
If boards do not act they risk class actions brought by aggrieved shareholders. Legal action will harm company share prices and compound any losses suffered. This applies to UBS today, but could easily apply to other companies in the future. Better to act, than react.
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