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Business Secretary Vince Cable said in June last year that "ridiculous levels of remuneration” in FTSE 100 companies were “going unchallenged as the norm, when there is no clear evidence of a correlation with performance".

A survey of executive pay was widely reported as showing that FTSE 100 directors had seen their total remuneration increase by an average of 49 per cent in the last financial year. Although that figure is misleading, there is now a growing head of steam for change. In recent days, David Cameron has promised to push through legislation, the details of which are likely to be announced later this month.

The Government consultation contained many suggestions for change. Which of these are most likely to make it into legislation? From recent statements, the front-runners seem to be:

Compulsory vote on pay (and pay-offs)
In the years since shareholders have had an advisory vote on remuneration reports, there have been very few outright "no" votes. So, although this sounds dramatic, would it actually have much impact? Shareholdings are increasingly fragmented and are often held for short periods. Many votes are in the hands of fund managers with little interest in long-term pay arrangements.

If a veto were introduced, practical difficulties would have to be addressed, such as how to unravel pay deals if the remuneration report is vetoed, particularly where tax has already been paid. It remains to be seen whether remuneration arrangements would have to be broken down into different elements with a separate vote on each, since a single vote on the whole report would be a blunt instrument.

We may see a binding vote specifically on termination payments, rather than the full remuneration report. If so, HR will have to take care when hiring an executive to ensure that any remuneration that is subject to a binding shareholder vote is conditional on that vote. Existing contracts may have to be changed over time.

More transparency on pay
Remuneration reports are often lengthy and complex, making it hard for shareholders to pick out the salient facts. David Cameron has said he would like to see "proper pay numbers so you can really see what people are being paid". This could mean an obligation to show a single, aggregate figure for total remuneration per director. Some thought would have to go into calculating that figure, for example, whether it should include performance-related pay awarded or paid out in a particular year.

Sometimes the highest earners in an organisation are not directors, so we may see disclosure requirements for pay below board level.

David Cameron seems to have ruled out the idea of disclosing the ratio between CEO pay and average or median earnings of the workforce as a whole. Comparisons between companies on such ratios could be misleading because of the disparity in pay structures.

Reform of remuneration committees
The Government believes that non-executive directors are recruited from too narrow a pool and do not challenge boards sufficiently on remuneration issues. There is also a perception (at least among politicians) that, as David Cameron put it, "with a lot of chairmen sitting on each other's remuneration committees, there has been a bit of back-scratching going on and a bit of a circular process of rewards being pushed up across the board".

So we may see, if not legislation, at least further guidance providing for independent members to be invited on to remuneration committees without becoming full non-executive directors, and measures to prevent conflicts of interest arising. The suggestion of having employee representatives on remuneration committees seems to have been ruled out by David Cameron on the grounds of tokenism.

Any legislation or regulations resulting from proposals announced later this month are likely to apply to financial years beginning on or after 1 October 2012.


http://www.peoplemanagement.co.uk/pm/articles/2012/01/tying-down-top-pay.htm