The ‘Shareholder Spring’ suggests that shareholders have finally had enough of executives rewarding themselves for sub-standard performance. Reform of executive compensation is therefore necessary but we must also ensure that the UK remains an attractive and competitive place to work. Executives who do deliver should be paid, but being rewarded for failure is no longer acceptable.
Four things must be done. First, shareholders should be empowered to hold companies to account. Second, remuneration construction and reporting must be made more transparent so shareholders can easily understand the payoffs for executives. Third, executives’ compensation must be more closely tied into the fortunes of the companies they work for. Finally, when executives do fail it should be possible for their past compensation to be clawed back.
Holding companies to account – The government’s proposals for votes on remuneration are too convoluted. Our proposal is that shareholder votes should remain advisory but with three tweaks. We believe that votes on remuneration should operate on a two strikes basis, similar to the system currently operating in Australia.
The vote would initially remain advisory, but with higher threshold of 65 percent to approve the policy. If the board achieves 50 percent approval but fails to secure 65 percent, the company has a year to change its policy in line with shareholder wishes. If, at the subsequent vote on the amended policy, it fails again to pass the 65 percent approval threshold the resolution to reject the policy becomes binding. If at any time the company fails to secure 50 percent approval the vote to reject it automatically becomes binding.