Leading article: More power to the shareholders

 

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New rules requiring that shareholders authorise executives' pay deals are to be unambiguously welcomed. As is the decision from the Business Secretary, Vince Cable, to insist that firms provide a single, clear figure for the total remuneration that directors receive for the year. So-called "golden handshake" payouts, when an executive exits a firm, must now also be spelled out in advance.

There is simply no justification for the spectacular rise in directors' pay in recent years. Last year, for example, FTSE 100 chief executives earned an average of £4.2m in salary, bonuses, share incentives and pension contributions – an increase of more than 400 per cent in just over a decade. Meanwhile, even lesser board members netted a whopping 49 per cent rise, even as average wages stagnated and inflation swallowed much of what meagre increases there were. Nor can businesses claim that executives' remuneration reflects improved performance: FTSE 100 bosses' average pay shot up 13 times faster than the value of the companies they ran in the decade to 2010.

At last, shareholders have decided to act, with recent investor rebellions at, amongst others, Barclays, AstraZeneca, Aviva, Trinity Mirror, Xstrata. Perhaps most high-profile of all, at last week's annual general meeting of the advertising giant WPP, a 30 per cent pay increase for chief executive Sir Martin Sorrell was voted down. Without changes in the law, however, such votes can only be "advice" to the board. And until they are binding, boards cannot be relied upon to listen. Take WPP, for example. The company's directors recommended the controversial £6.8m package for Sir Martin despite the fact that 42 per cent of shareholders voted against the remuneration report last year.

Critics have accused Mr Cable of diluting his proposals by limiting the requirement to a vote every three years rather than annually. But he was right to make the change. Annual votes might have destabilised management teams and encouraged short-term thinking.

With such changes in place, shareholders will finally have the tools to curb excessive executive pay. They must use them.

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