Vince Cable sets out his plans to curb the pay of top executives.
Yesterday, business secretary Vince Cable laid out his plans to stamp out the worst excesses of corporate greed. However, the Liberal Democrat MP immediately came under fire from critics on both left and right of the political spectrum.
Curbing corporate excess
In the three months to November 2011, total UK pay (including bonuses) crept up by 1.9% on a year earlier. However, the Consumer Prices Index measure of inflation rose 4.2% in the year to December 2011. Thus, in real (inflation-adjusted) terms, wages and disposable incomes have been shrinking for at least two years.
However, directors of large companies aren't feeling this pinch. In fact, in the 2010/11 financial year, directors of blue-chip FTSE 100 companies saw their total earnings soar by almost half (49%), on average.
What's more, FTSE 100 board members pocketed almost £2.7 million each in the last financial year, or more than 100 times the average UK wage of £25,900.
Therefore, in a long-overdue attempt to rein in the rapidly rising pay of top executives, Vince Cable aims to hand more power to business owners -- their shareholders.
Shareholders are revolting!
Clearly, at a time when employees are experiencing hardship due to real wage cuts and job losses, it is politically unacceptable for company directors to continue 'gobbling at the trough'.
What's more, shareholders are extremely dissatisfied with remuneration committees, which are often described as nothing more than an Old Boys' network. Their members -- both executives and non-executives -- stand accused of failing to ensure that top-level corporate pay and benefits are transparent, justified and acceptable.
Hence, in an ambitious review, Cable sets out plans to give extra power to shareholders to regulate, unpick and vote on what are often highly complicated (even obscure and opaque) pay deals.
Following a three-month consultation, the business secretary's report wants company shareholders to have a binding vote on directors' pay deals. In addition, he proposes new controls on payouts to departing executives, plus the right to claw back 'rewards for failure'.
Greater transparency and diversity
Cable also wants to see greater transparency over pay, but will not force companies to publish ratios revealing the multiples between directors' and workers' pay. However, companies will be forced to show how their executive pay stacks up against other significant payouts, such as dividends paid to shareholders.
In a nod to existing legislation against discrimination on the grounds of gender and ethnicity, Cable urged companies to 'spread the net wider' by recruiting from a broader mix of individuals. However, Cable has decided against regulation to inject employee representatives onto company boards (something that works very successfully in German industry).
Handle with care
Generally speaking, the government's latest plans to tackle executive largesse have been broadly welcomed by business leaders, institutional investors and shareholders. Of course, it remains to be seen how successful these initiatives will turn out to be, especially after they've been through the relentless mincer that is corporate lobbying.
However, all shareholders should welcome initiatives to align pay more closely with corporate performance. Otherwise, directors will continue to take all the gain, while shareholders take all the pain!
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