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annual votes on pay aim to curb ‘fat cats’

December 2001

Plans by the UK government to give shareholders the right to an annual vote on directors’ pay are to be unveiled before Christmas.

A consultation document on draft regulations to implement the measures is being produced by the Department of Trade and Industry (DTI) and revised regulations are due to appear before autumn 2002.

They are expected to require quoted companies to publish a report on directors’ remuneration as part of their annual reports.

The report would have to disclose details of individual directors’ pay packages, outline the role and policies of the board’s remuneration committee, and provide graphs with historic information on the company’s performance, allowing shareholders to judge salary rises against ‘relevant criteria’.

Shareholders would then be asked to vote on the report at the company’s annual meeting. The vote would be advisory and would not require shareholders to approve specific levels of remuneration, but the government says it will nonetheless allow them ‘to express a view on matters such as the robustness of performance criteria and membership of the remuneration committee’.

The government’s response to growing concern over ‘fat cat’ pay follows a recent Incomes Data Services survey which found that the basic salary of FTSE100 chief executives rose by 14.8 per cent in the year to 30 June and that total pay, including bonuses and incentive payments, rose by 18.3 per cent.

Trade and industry ministers, backed by the chancellor of the exchequer, have repeatedly warned business over the past three years that they would step in with regulation if companies failed voluntarily to limit executive pay rises.

UK trade and industry secretary Patricia Hewitt said the government wanted to ‘ensure greater transparency, improve accountability and strengthen links between performance and pay’.

She claimed directors were too often ‘lavishly rewarded for lack-lustre or even poor performances’ which went against the interests of companies, their shareholders, ‘and the UK as a whole’.

Stuart Bell, research director at Pensions Investment Research Consultants, said: ‘Giving shareholders a direct say is the only way of overcoming the conflict of interest faced by boards in determining their own remuneration. It is an essential element of corporate accountability.’

But he added: ‘The onus will now be on shareholders to demonstrate that they can act independently, consistently and decisively to enforce remuneration policies that are transparent and fair’.

Trades Union Congress general secretary John Monks said: ‘This will mean little if institutional investors do not cast their votes.’

The DTI said it had ‘taken account’ of some conclusions of the final report of the UK company law review, published last July, before deciding whether to go ahead with the new measures. It is currently studying the law review’s report and will respond to its recommendations next year.




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