Shareholders will be given more power to decide on executive pay while there must be more transparency on how performance is measured, Vince Cable has announced.

In a speech to Parliament, the business secretary said that shareholders needed binding votes on “future pay policy” so they can “exert more pressure on the board”.

This, he said, would help to address the disconnect between top reward and performance that has caused widespread public outrage.

Companies will be required by the government to give shareholders more information on how the board judges performance as well as revealing the “real numbers” that executives could take home, he revealed.

Binding votes will be required to approve any director being given a notice period which is longer than a year, as well as any ‘golden goodbyes’ for executives that are worth more than a year’s pay.

Shareholders will also get an advisory vote on how the agreed pay policy has been implemented and Cable said he would consider whether policy should go further in this area.

The level of shareholder support needed to pass pay proposals will be reviewed. One possibility is that the threshold for a successful vote could be raised to 75 per cent in favour, said the business secretary.

The minister said he would “consult shortly” on reforming the current voting arrangements.
In terms of making pay easier to understand, Cable said that the government will require firms to publish more revealing remuneration reports, via secondary legislation set to come in later this year.

“This starts with reports being split into two sections: one detailing the proposed future policy for executive pay; the other setting out how pay policy has been implemented in the preceding year,” Cable explained.

In future, pay committees will be expected to explain why they have used specific benchmarks and how they have taken employee earnings - including pay differentials – into account in setting pay.
However, he stopped short of telling companies to include workers on their remuneration boards saying it was “very desirable but simply would not work”.

Instead, he said: “UK employees in large companies already have had the right to request that their employers consult them on issues relating to the organisation, including on pay. This is a potentially powerful mechanism for employees and it has been under-utilised to date. I encourage employees to use this and put executive pay on the agenda.”

Pay ratios were also dismissed “because different companies will have different ratios, which could create comparison difficulties,” Cable explained. But the minister did call for more diversity on boards and remuneration committees saying that this would be crucial to challenging “crony capitalism” where chairmen sit on each other’s pay boards and vote on each other’s rewards.

Reacting to the announcements, Charles Cotton, CIPD reward adviser, said: “What strikes me is that despite all the rhetoric over the past couple of months there’s very little around preventing executive ‘rewards for failure’. There’s just a binding vote on any directors’ notice period which is longer than one year and on exit payments over one year's salary.”

He said he would have liked to see a more robust approach to capping the maximum value of severance packages and tapering them over the career of the executive. A reward package could be paid out over a minimum number of months, which would stop when the executive gets a new job, or cease should illegality be discovered, he said. Shares that cannot be sold off for a number of years should also be included.

Terry Scuoler, chief executive of EEF, the manufacturers’ organisation said: “Today's proposals risk aiming a large sledgehammer against the wrong nut. Giving shareholders a binding vote at annual general meetings will prove intrusive but is unlikely to be effective.

“Rather than focussing on the pay of top managers, which are set by global markets, the government should maintain on its focus on helping employers create well paid opportunities for the rest of the workforce and ensuring it has skills to fill them.”