Investors should get pay veto, says IoD

Shareholders should be given the right to veto "fat cat" pay packages, one of Britain's most influential business lobbying groups saidyesterday, on the final day of a Government consultation on executive remuneration.

The Institute of Directors (IoD) warned that the furore over what bosses have been paid was jeopardising the reputation of business.

"We are aware of the difficult challenges faced by remuneration committees in responding to a global market for executive talent, but the current pace of increase in executive pay is unsustainable," said Simon Lewis, the director-general of the IoD. "The legitimacy of UK business in the eyes of wider society is significantly damaged by pay packages that are not clearly linked to company performance."

The IoD's comments will be taken seriously by the Government, which has promised to act amid mounting public anger about the pay awards made by many large companies.

An inquiry by the independent High Pay Commission, whichreported this week, said that the pay of top executives has increased by more than 4,000 per cent over the past 30 years and that the ratiobetween executive pay and average pay has widened dramatically.

The IoD called for a string ofreforms, including a requirement for companies' remuneration committees to be more diverse and for pay formulas to be simplified.

Its most controversial proposal is that the vote shareholders are given each year on their companies' executive remuneration policies, which is currently advisory, should be binding. In effect, that would giveinvestors the power to torpedo companies' executive pay.

Nicolas Stretch, of the law firm CMS Cameron McKenna, said that the proposal would be very difficult for many companies.

"The proposal for a binding shareholder vote on pay has been more strongly opposed given the serious dislocation that it would cause and the fact that, despite popular ideas about companies ignoring theirinvestors on pay, the vast majority of companies do actually listen very carefully to shareholder votes, even if they are not binding," he said.

However, Mr Stretch warned that the debate should be seen as a warning signal for companies considering making generous pay awards in the near future. "[They] might well be advised collectively to go for a year of self-restraint to avoid triggering legislation," he said.