WorkLife

Our thoughts on the world of employment law - and beyond.

Controls on executive pay

Last month, the High Pay Centre published the results of its annual survey of FTSE 100 CEO pay packages, resulting in reports of headline statistics that the average FTSE100 CEO is now receiving £5.5 million a year and the top earner made £70,416,000 in 2015. These figures are made up of a combination of cash, benefits and share-based incentives designed to keep executive incentives aligned with the best interests of shareholders, but are increasing year on year at a faster rate than average pay.

Thereafter in a speech at the G20 summit Theresa May indicated that the government intended shortly to launch a consultation on corporate irresponsibility, including amongst other matters excessive corporate pay and measures to give employees and customers representation on boards.

This caused me to reflect on the existing legal framework for controls on pay for directors of quoted companies. In reality, our existing framework is already hugely more restrictive than it once was. OK, I admit, the regulatory developments in this area may not be bedtime reading, but almost every day one reads reports of apparent largesse and "fat-cat" bonuses; yet very little mention of the existing controls already in place.

The controls in this area are included within UK regulations introduced in 2013 which amended the previous arrangements. The regime applies to quoted companies (not including companies with shares admitted to AIM) and has two key elements:

  1. A requirement that a company may only pay remuneration to its directors (including payments on termination of a director's employment) in accordance with a remuneration policy which has been approved in advance by shareholders, except with explicit shareholder approval; and
  2. Requirements for annual reporting on remuneration via the annual remuneration report which is currently subject to an advisory vote only.

This structure enables pay arrangements for directors within the company's remuneration policy to be voted down by shareholders (in a very public way) and has placed genuine controls on in what circumstances directors are paid (even if it has not stopped pay for FTSE directors increasing at a much quicker rate than average wages).

The aim of these restrictions are of course laudable but the structure does also mean that companies do not always have flexibility to pay directors in accordance with changing commercial circumstances (eg to incentivise specific short-term deliverables in the best interests of shareholders, for example, in the context of a change of control) at least without shareholder approval which in practical terms can be almost impossible to achieve. Likewise it is not possible for quoted companies to make settlement payments to executives to take into account, for example discrimination or other unlawful conduct if any such payment is outside of the terms of the company's (usually tightly drafted) remuneration policy. Perhaps one of the drivers for this is to ensure that such matters are heard in a public forum (and not settled on financial terms) although the reality is I suspect that it is very rare for such cases to be pursued.

In any event a clear marker has been laid down that there is more to come in challenging excessive corporate pay and that this issue is very much on the government's agenda. I await the consultation with interest.

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