Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (The Proposed Reforms)

The High Pay Commission provided the groundwork for reforms.  The continuing shareholder revolt and public criticism effectively forced the government's hand.  The proposals (but not the actual statutory language) surfaced in June.  The press release announcing the proposal is here.  A statement of government policy on the issue is here. 

The government's proposal stops short of making say on pay mandatory.  Instead, shareholders have the right to approve the company's "pay policy."  The pay policy report submitted to shareholders must include:

• A table setting out the key elements of pay and supporting information, including how each supports the achievement of the company’s strategy, the maximum potential value and performance metrics.

• Information on employment contracts.

• Scenarios for what directors will get paid for performance that is above, on, and below target.

• Information on the percentage change in profit, dividends, and the overall spend on pay.

• The principles on which exit payments will be made, including how they will be calculated; whether the company will distinguish between types of leave or the circumstances of exit and how performance will be taken into account.

• Material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.

The pay policy also must explain any "exit payments" or golden parachutes.  Companies cannot "pay exiting directors more than shareholders have agreed."  To the extent a pay policy is voted down, it will have to "continue to use the existing policy until a revised policy is agreed." 

The vote on pay policy must occur everytime it is changed or every three years, whichever is sooner.  The government reasoned that this approach would "encourage companies to devise a policy for the long term, clearly linked to their strategy and will put downward pressure on pay ratcheting."  In addition, companies receiving a negative advisory vote on specific pay packages must resubmit the pay policy to shareholders the following year. 

The government also will require a "total compensation" calculation much like the one used in the US and has under consideration a requirement that a company receiving a negative say on pay vote from a "substantial minority" of shareholders be required to issue a "a statement saying what they will do to address shareholder concerns." 

The proposals, therefore, amounts to a compromise.  The government stopped short of transforming advisory votes on pay packages into binding votes.  The government essentially forced boards to submit to shareholders the process and factors used in determining compensation.  Presumably the aide was that these will be binding and prevent a board from significantly changing the policy in order to pay executive officers even more.

The approach will increase the complexity of pay approval.  Shareholders will get at least two votes, one on policies and one on actual pay packages.  Boards will find themselves hemmed in by shareholder approved policies.

But will it work?  To the extent the concern is over the amount of compensation, they are not likely to succeed.  Boards will have an incentive to submit policies that are broad and permit plenty of discretion.  As a result, pay will continue to go up.  Public anger and pressure will likely continue.