UK investors meet with government and warn that binding pay vote could backfire

Some of the UK’s biggest asset managers and pension funds have warned the government that introducing a binding shareholder vote on executive remuneration could thwart its intentions to get investors to veto excessive pay by reducing the level of voting. The message was delivered at a closed-door meeting yesterday between investors – understood to include the Association of British Insurers and the Investment Management Association along with the country’s biggest institutional investors – and representatives of the Department for Business, Innovation and Skills (BIS). Sources present at the meeting told Responsible Investor that investors are broadly against the existing advisory vote on pay becoming binding. They say the legal ramifications of voting down a previously agreed executive package (investors currently vote on the previous year’s executive compensation) are too complicated and that investors would be inclined not to vote rather than be tied down to a binding decision.
The UK government has been trying to assuage public anger at excessive corporate bonuses by saying they will push shareholders to get tough. UK Prime Minister, David Cameron, last week said the government was minded to introduce some kind of binding vote on pay. Vince Cable, UK Business Secretary will shortly publish the government’s review on executive remuneration. One investor at the meeting said: “It is not simple to just transfer an advisory vote into a binding vote on pay, andthere is little to suggest that investors would use the vote. The government has been quite vocal about saying it wants some sort of binding vote, but the question now is on what?”
Following the meeting, it is believed the government is considering whether a binding shareholder vote could be introduced on ‘forward-looking’ company pay policy. Shareholders already have the right to vote down changes in directors’ share incentive schemes. Both the government and investors are believed to be keen on transparency and simplicity for executive pay deals. One option on the table is the scrapping of the current Long Term Incentive Plan (LTIP) structure, which many argue is overly complicated. Investors say this might be replaced by a system of basic pay combined with a clearly defined bonus held in an escrow account and paid out in portions over five years, or held in company shares until retirement, to ensure that rewards are commensurate with long-term company performance. A binding vote is also under consideration to combat so-called “rewards for failure” where executives leave companies with large pay-offs following poor performance. In addition, the government has said it is looking to reform company remuneration committees to ensure independence in executive pay reviews.
A BIS spokesman said that following the meeting: “all the options are still on the table”.