Government proposals to curb top pay will promote better shareholder engagement with corporates on reward issues but will not have a dramatic effect on pay levels in the short term, experts have warned.

The proposals unveiled by Business Secretary Vince Cable yesterday will give company shareholders a binding vote on future pay policies, and require firms to make high pay packages easier to understand by providing a ‘single figure’ for the total pay of each director.

“These measures represent the most significant recasting of executive pay rules for a decade,” said Sean O'Hare, remuneration partner at PwC.

“Anyone who thinks pay does not reflect what shareholders want should feel satisfied - shareholders now clearly have all of the information and tools at their disposal to hold remuneration committees to account. Nowhere else in the world will executives see their pay subject to such rigorous checks and scrutiny.”

However, he said that people who thought these changes would bring dramatic drops in pay levels would be “disappointed”. Instead, binding votes on future pay would force greater engagement between corporates and shareholders behind the scenes, with management keen to avoid a surprise vote against pay packages.

Jonathan Exten-Wright, employment partner at DLA Piper, warned that shareholder votes could be “cumbersome” particularly if the package is rejected and has to be renegotiated possibly leading to deadlock. “Existing contracts will need to be changed to reflect this new requirement, unless legislation is introduced to trump existing terms."

In fact Cable has said the government will “consult shortly” on reforming current voting rules and that secondary legislation will come in later this year around making pay easier to understand. This could bring clarification on existing contracts.

Joanne Segars, NAPF chief executive, agreed that the introduction of a binding vote on pay “needs to be handled very carefully” and that shareholders need to know more about what it means.

“A vote must not impede the effective management of businesses, or the constructive dialogue between shareholders and boards.”

Concerns were also raised about explaining top pay using a ‘single figure’ and O’Hare warned that this policy could “create more confusion than clarity,” because of the varying timeframes and performance periods of executive pay programmes.

Segars welcomed the single figure idea and said it would “help shareholders hold executive pay up to the light”.

“We echo the call for more diversity among decision makers,” she added.

Clearer top pay could also make a ‘claw-back’ system for recovering bonuses from former executives easier to implement.

But Exten-Wright said: “In reality it is it is difficult to see [bonus clawback mechanisms] applying except in the most extreme circumstances, since it means taking back pay, and in practice actual recovery is bound to lead to disputes as to whether the claw back has been triggered and difficulties in achieving recovery of the sums paid over."

Duncan Brown, principal for reward and engagement at Aon Hewitt, said: “If shareholders have the power to stop excessive pay decisions then more will take it seriously, especially If Vince Cable puts in a 75 per cent threshold [on votes in favour of an award]. But if it’s just a straight majority vote it will have less impact.”

He welcomed the ‘single figure’ proposal on pay, saying that more transparency was a good thing, but added that he was more sceptical about the effectiveness of requiring firms to publish clearer pay reports.

“[Remuneration reports] are as much about what you can hide as what you actually say. A lot of effort goes into what’s said and how it is said rather than just putting down what’s there,” he said.