Vince Cable plans executive pay crackdown

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Vince Cable moved to strengthen the hand of shareholders today by giving them powers to lead the crackdown on excessive executive pay deals.

The Business Secretary's proposed reforms will force companies to have binding votes on directors' pay plans every three years, or annually if changes are made.

For the first time, this vote will be legally binding - meaning that investors can overthrow pay proposals and that companies will not be able to make payments outside its scope.

The move represents a climbdown on previous aims to hold compulsory votes on pay annually, but will vastly improve current rules in which shareholder votes are advisory and can be ignored by companies.

Mr Cable has also stuck by plans to insist firms provide one single figure for total annual pay in order to make remuneration more transparent.

He said the package of reforms will "strengthen the hand of shareholders to challenge excessive pay whilst not imposing unnecessary regulatory burdens".

He said on unveiling the reforms that ever-increasing pay packets had become "irrational and damaging" in the years leading up to the financial crisis.

"Top pay got out of control, most obviously in the banking sector, but also elsewhere in corporate Britain."

"It was irrational and damaging and it was necessary that shareholders should have the confidence to act," he added.

The moves come amid growing shareholder activism over executive pay, as shown by last week's rejection of WPP's remuneration report which included a £6.8 million pay deal for chief executive Sir Martin Sorrell.

The so-called shareholder spring has seen investors become more effective at exerting pressure on companies, with Aviva's Andrew Moss the highest profile boss to have been ousted in recent months.

Mr Cable said his drive to clamp down on excessive pay will "give shareholders new powers to hold companies to account on the structure and level of pay, make it easier to understand what directors are earning and how this links to company strategy and performance".

The binding vote on pay policy will also cover exit payments in a move that could mark the end of excessive "golden goodbyes".

When a director leaves a company, it will "promptly" have to publish details of payments received - a marked improvement on current rules whereby companies only have to disclose exit payments in the annual report.

Mr Cable dropped a proposal that the binding pay vote must receive the backing of a super-majority of three-quarters of investors, instead opting for a simple majority of 50% required.

He said it would have been legally very complicated to insist on a super-majority and could have allowed investors to "hold a company to ransom".

But there will be an annual advisory vote on earnings in the previous year, including actual sums paid to directors, which if failed will require the company to put pay plans to a binding vote.

Voluntary corporate governance rules are also being amended to ensure that if a significant minority vote against pay plans, a firm must make a statement to the market.

Otto Thoresen, director general of the Association of British Insurers (ABI) hailed Mr Cable's proposals as "practical, workable and should help tackle excessive pay".

He also welcomed the decision to make binding votes every three years, saying a fixed annual vote on pay had tended to drive up pay in practice rather than restrain it.

It had also been feared that a binding annual vote would make investors less inclined to protest in case they destabilised management teams.

Reforms outlined today will also make changes to pay disclosure to simplify how firms report directors' pay, including the proposed single figure, in an effort to make often highly complex remuneration reports easier to understand and more transparent.

The figure will include actual pay earned, including bonuses and long term incentives paid out in the year, but not future potential pay under long-term incentive schemes granted.

The Government will outline a method to calculate the figure to ensure consistency between companies.

Mr Cable hopes to have the reforms in place by October 2013 and is bringing forward amendments to the Enterprise and Regulatory Reform Bill, which is currently before Parliament.

The measures come in addition to recently introduced rules requiring greater pay disclosure within banks, drawn up by the Treasury in the wake of the financial crisis.

The Financial Services Authority is also introducing clawback clauses to more closely link pay to performance.