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Press Release

Cable fails to curb high pay

23 January 2012

EXPECTING FUND MANAGERS WHO ARE ALSO ON THE GRAVY TRAIN TO CURB EXCESSIVE PAY IS PUTTING HOPE BEFORE EXPERIENCE SAYS GMB

Vince Cable clearly identifies that the ballooning of executive pay "is a clear market failure" and has produced mouse to solve the problem says union

GMB commented on proposals from Business Secretary Vince Cable to curb excesses on executive pay. See notes to Editors below.

Paul Kenny, GMB General Secretary said “Vince Cable clearly identifies that the ballooning of executive pay “is a clear market failure”.

Mr Cable then puts his faith in transparency and in the shareholders to sort the problem. Expecting fund managers, representing shareholders, who themselves are also on the gravy train to sort this is putting hope before experience. He bottled putting an employee voice on the remuneration committee. Mr Cable has produced a mouse”.

Notes:

BIS EXECUTIVE PAY MEDIA BRIEFING NOTE – MONDAY 23RDJANUARY

  • The Business Secretary has announced proposals today to curb out of control executive pay. This represents the most comprehensive reform of governance on directors' pay in almost a decade.
  • There is now broad consensus that something must be done to address the disconnect between top pay and company performance. FTSE 100 CEO pay has increased by 13.6% on average year on year between 1999 and 2010. By comparison, the average annual increase in the FTSE index was 1.7% across the same period.
  • Ultimately this problem can only be solved by companies and their shareholders. It's not Government's role to micro-manage company pay but there are things we can do to address what is a clear market failure.
  • Today Vince Cable has set out the areas in which the Government will be taking action following our Call for Evidence on executive pay which was published last autumn.
  • Our response is the outcome of detailed discussions we've been having with a wide range of stakeholders over the last few months. It also takes into account the useful work done by the High Pay Commission which made a number of recommendations – most of which we will be acting upon.
  • No proposal on its own is a magic bullet, but together they can enable the necessary transformation to get underway.
  • Our proposals will –
    • Boost transparencyso that what people are paid is clear

and easily understood by shareholders and employees;

  • Give shareholders more effective controlintroducing binding votes and changing voting rules so investors can challenge their Boards more vociferously and hold them to account;
  • Increase the remuneration committees (REMCOs)to challenge the status quo;
  • Encourage best practiceled by the business and investor community.

Greater transparency

  • Shareholders have told us that they would welcome improvements to the quality of company reporting on pay so that it is much clearer how much executives are paid and for what. Through secondary legislation later this year, we will introduce the following measures to give shareholders the information they need to ensure effective scrutiny of the businesses they have stakes in:

· Require remuneration reports to be split into two sections: one detailing the proposed future policy for executive pay; the other setting out how pay policy has been implemented in the preceding year. Too many reports are currently an unintelligible mix of the two;

1 Requiring companies to be clear about pay policy in the future. REMCO committees will be expected to explain why they have used specific benchmarks and how they have taken employee earnings – including pay differentials – into account when setting pay. Recognising that different companies will have different ratios because of the nature of the business, we will not mandate that companies publish a standardised ratio.

2 Requiring companies to explain clearly how proposed pay structures reflect and support company strategy, how performance will be assessed and how it will translate into rewards under different scenarios. In particular, they will need to open up the performance criteria for long-term incentive plans (LTIPs) and bonuses so in future companies will have to justify why they are deserved;

3 Requiring greater clarity on exit payments that have been made including the contractual terms offered to executives;

4 Requiring companies to publish a single figure for each individual executive, offering clarity on exactly how much has been awarded and enabling trends to be monitored

5 Requiring companies to explain how the pay awards relate to the performance of the company so shareholders will be able to assess how stated pay policy is being implemented in reality;

6 Requiring companies to produce a distribution statement, outlining how executive pay compares with other dispersals such as dividends, business investment, taxation and general staffing costs.

Employee engagement

· We want companies to consider the views of their employees and

offer employees a route to feed back what they think of board pay.

  • Companies will have to explain how they have consulted and taken into account the views of employees.
  • UK employees in large companies already have the right to request that their employers consult them on issues relating to the organisation, including on pay (the Information and Consultation of Employees Regulations 2004). This is a potentially powerful mechanism and has been under-utilised to date. We want to encourage employees to make use of it and put executive pay on the agenda.
  • REMCOs are currently expected to say how they have taken account of pay and conditions of employees but rarely give a meaningful explanation of this in pay reports.
  • We will require a fuller explanation of how they have done this, including whether they consulted employees, what metrics they used to assess employee pay and pay distribution, and how all of this information impacted on their proposed pay policy.

Shareholder powers

  • The introduction of advisory votes on remuneration reports nine years ago was an important step in encouraging shareholders to actively engage with the companies they have stakes in. But the limitations of that approach are why we are now having to look at more radical options.
  • We therefore propose specific options to give shareholders a binding votewhich should empower shareholders to get a grip on pay. This will include the following options, all of which we will launch a formal consultation on as they require legislation:

· A binding vote on future pay policy including details of how

performance will be judged and real numbers on the potential pay outs directors could receive. Companies will have to include a statement on how they have taken account shareholder views and the result of previous votes;

· A binding vote on any directors' notice period longer

than one year (shareholders currently get a vote on contracts longer than two years) and on exit payments of more than one year's salary – which gives shareholders more say over payments for failure;

· Shareholders will still get an advisory vote on how the agreed pay policy has been implemented. We will be considering whether there need to be further sanctions that could be applied when a significant number of shareholders dissent in this advisory vote.

  • The Consultation will also look at what level of shareholder support companiesshould have to get in order to pass pay proposals. For example whether pay proposals should be treated as a 'special resolution'. This would mean that 75% of those shareholders voting must be in favour for the motion to be passed rather than a simple majority as is currently the case.

Preventing payments for failure

  • Bolstering their voting rights will give shareholders more power to prevent payments for failure, as will our requirement for greater transparency on the detail of contractual entitlements.
  • We also want to ensure that no company finds itself unable to withhold or recoup pay awards when company performance has not lived up to expectations.
  • In response to the banking crisis, the financial services sector has already been required to make provision for this and indeed some companies in other sectors have followed suit by writing 'clawback' clauses into executive contracts.
  • A significant number of respondents to our Call for Evidence agreed that allUK quoted companies should be required to have clawback mechanisms in place. So we will be asking the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code to require all large public companies to adopt clawbacks.

Incentivising shareholders to use the new powers

  • The Financial Reporting Council will be updating the Stewardship Code, first introduced in July 2010, which sets out how institutional investors should exercise their shareholding rights effectively and requires them to publish their voting policy on issues such as pay. We are encouraged by the number of investors already signed up but would strongly encourage the FRC to get more on board this year.

Encouraging greater diversity on remuneration committees

· Alongside these reforms to increase the information available to shareholders and bolster their ability to act on it, we also need to shake up the way that decisions on pay are made.

· Having diverse REMCO membership is crucial to changing the status quo on executive pay. The right way to tackle this is through more diversity on boards as a whole.

· That is why the Government has already taken action to broaden the membership base through encouraging headhunters to look beyond existing board members, requiring companies to report on their boardroom diversity policy from October this year and adopting Lord Davies' recommendations designed to boost the proportion of women on boards. We have made it clear that while we prefer a voluntary approach, mandated diversity measures will follow if progress is inadequate.

1 We want to see more people being appointed to Boards who come from different professional backgrounds – lawyers, public servants, academics – as well as people who have not been directors before.

  • In October, a new provision in the UK Corporate Governance Code will come into force, requiring companies to report on their policy on boardroom diversity, how they propose to deliver this and what progress they have made.
  • This sits alongside a new code of conduct for executive headhunters which encourages them to recruit executive directors who are not currently on an existing Boards; and good practice guidance from the ABI on the importance of board diversity, board evaluation and proper succession planning.

Addressing conflict of interest

· We also want to address obvious conflicts in the system. For example we will be asking REMCOs to be more accountable for how they have appointed, used and paid consultants to advise them on executive pay.

· We know that there are a small but concerning number of FTSE executives serving on remuneration committees in other companies, where they have an inherent interest in promoting the culture of high pay.

· We will ask the FRC to amend the Code to end the practice of serving executives sitting on the remuneration committees of other large companies.

Sector-led reform

  • This package of measures will create a more robust framework within which executive pay is set and agreed.
  • However lasting reform depends on active shareholders and responsible businesses accepting the need for change and pushing the agenda forward.
  • Deborah Hargreaves, who chaired the recent High Pay Commission will be establishing a new project which launches next week to monitor the state of pay at the top. This High Pay Centre, will perform an important role in delivering the high quality research that this area of debate badly needs.



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