Shareholders will be given power to curb executive pay, Government announces

Companies will also have to justify high salaries in their remuneration reports and will have to increase the diversity of their boards, Business Secretary Vince Cable has announced. However, this increased diversity will not go as far as including representation from the workforce as recommended by the High Pay Commission in its original review of executive pay last year.

Cable told the House of Commons that the evidence from a consultation process which ran from September to November last year showed that "businesses and investors recognise that there is a disconnect between top pay and company performance".

"It is not Government's role to micro-manage company pay, but there are things we can do to address what is a clear market failure," he said.

Cable's plans, outlined in a speech to the Social Market Foundation in London earlier today, were revealed yesterday after Shadow Business Secretary Chuka Umunna tabled an urgent question in the House of Commons. Umunna said that the Government has no right to demand "greater accountability and transparency from people in business" without "being held to account for their policies" in the House of Commons.

The reforms will see shareholders given binding votes on a company's pay policy and payouts and exit packages made to departing executives, while also being given 'claw back' powers allowing them to recoup bonuses which it is later revealed were paid unjustifiably. At present, shareholders only have an advisory role on pay issues.

Changes will also be made to increase the transparency of "dense and opaque" remuneration reports, Cable said. Companies will be forced to publish a single figure for executives' pay deals and will have to explain how those figures were reached by reference to performance. Boards will also have to outline how executive pay compares to other payouts such as dividends, although they will not have to indicate how executive salaries compare to those of ordinary employees.

Companies will also be encouraged to increase diversity on their boards including by hiring non-executives from a broader pool of academics, public servants, lawyers and first-time board members. However, Cable dismissed recommendations to include employee representation on boards as "not practical".

Judith Greaves, an expert in tax law and employee incentives with Pinsent Masons, the law firm behind Out-Law.com, said that although Cable made it clear in his announcement that companies would be encouraged to engage more with employees on questions of remuneration they would "generally be relieved" that they were not going to be compelled to bring employee representatives onto their remuneration committees.

"The Government's view has clearly been that greater shareholder involvement will be a feature of any action to curb executive pay increases. However, some institutional shareholders have expressed concerns about becoming too involved in the way companies are run. Further consultation on an appropriate level of shareholder involvement will allow specific concerns to be considered and a workable approach agreed upon," she said.

The proposals received a mixed reception from business groups with the Institute of Directors (IoD) commenting that greater simplicity and transparency in relation to pay arrangements were urgently needed. However manufacturers' organisation EEF said the proposals risked "aiming a large sledgehammer against the wrong nut" and called for the Government to instead on helping employers create well paid opportunities for the rest of the workforce.

Roger Barker, head of corporate governance with the IoD, added that the Government was "right" not to force companies to include employees on remuneration committees but that boards "should still consider ways in which they can engage with employees and other stakeholders" on pay as a way to rebuild trust in the system.

Unions accused the Government of merely "tinkering" with the current boardroom pay regime, with the TUC's Brendan Barber accusing Cable of shying away from making "big decisions" with his reforms. "Overpaid and underperforming directions concerned about greater public scrutiny of their pay and bonus arrangements can rest easy," he said.