A higher threshold for pay votes?

Companies could face a 75% threshold to pass resolutions relating to executive pay, Business Secretary Vince Cable told Parliament yesterday as he set out new reforms.

Cable revealed that the Government is putting forward a mixture of greater transparency, increased shareholder powers and further best practice guidance. On shareholder powers the Government will consult further, but options under consideration are a binding vote on future pay policy and on notice periods greater than one year, and an increase in the level of support required to pass a policy, possibly to 75%.

In particular we favour the forward looking vote as we said in our response to a BIS consultation, “We believe that the Government should look at whether upfront approval could be sought for the contractual terms for directors, what we have called the ‘heads of terms’. In addition the Government could explore whether shareholder authority could be sought for the future distribution of profits (ie remuneration vs dividends vs reinvestment).”

Secondary legislation will be introduced later this year to split remuneration reports in two - a forward looking section and a section on implementation of existing policy. The forward-looking section will require an explanation of metrics used, any comparison with employee earnings used and how views of employees are taken into account. The section on implementation will require a simple single-figure disclosure for each director, how rewards relate to performance and set out the distribution of pay versus dividends, reinvestment and so on. In addition, the UK Corporate Governance Code will be amended to state that companies should introduce clawback policies.

In order to get an idea of the impact of a higher threshold, we looked at 1,700 votes on remuneration reports at a sample of companies over the last four years. We found the following

• Looking at votes for and against only, there were 85 cases where companies failed to secure a vote in favour of at least 75% during the period;

• Only one bank in one year failed to achieve at least 75% in favour (RBS in 2009);

• In 2011 there were 31 companies (6.5%) that failed to achieve 75% votes in favour of their remuneration report;

• Companies failing to reach 75% in 2011 include WPP, Thomas Cook, ICAP and Aberdeen Asset Management.

Of course it’s not a straight read across, as investors may vote differently when they know both that it is easier to inflict a defeat and that the result would be binding. Nonetheless it does look like this reform could have teeth. It would also strengthen the hand of minority shareholders in companies that have a large dominant investor. For example, Xstrata would have lost the vote on its remuneration report last year, despite Glencore’s support.

Overall, it’s two cheers from PIRC for the package of reform set out yesterday. We continue to believe that real reform of remuneration committees, widening the membership to allow direct employee and investor representation, is also required in order to ensure that company decision-making is improved. Unfortunately this has been ducked. We were disappointed too that disclosure of pay ratios has been dropped. Finally, we also believe that the Government should make disclosure of shareholder voting records mandatory. If asset managers in particular are to have even greater powers over pay it is vital that they can be accountable for how they use them.