By Maximilian Clarke
The UK’s Business Secretary Vince Cable yesterday won widespread praise after announcing plans to cap the excesses of executive remuneration.
Trade unions, who had long criticised divisive pay levels that, particularly in wake of the downturn, have fuelled creation of an increasingly polarised society, welcomed the move; as did business organisations who considered it a boost for the legitimacy of unpopular corporations.
But whilst the crux of the message has been well received by the majority, a number of legal commentators have flagged concerns about the announcement.
Of particular concern, as Daniel Isaac, a partner in the employment team at international law firm Withers comments, is a general lack of clarity:
“Giving shareholders a binding vote on pay-offs worth more than a year's salary could drive pay-offs down but, as ever, the devil is in the detail. What is a year's salary? Basic salary or a year's remuneration including bonus and benefits? Will compensation for statutory claims such as unfair dismissal be included in calculating whether the package needs to go to shareholders? If a package is not approved, what happens to the employee's legal claims?”
Paul Randall and Caroline Carter, partners at the international corporate law firm, Ashurst, commented, again voicing concern over practical aspects.
Paul Randall said: "Proposals for a binding vote on the remuneration report had been widely expected. The effectiveness of this will of course depend on whether shareholders are sufficiently engaged to use their powers and there will be practical difficulties to overcome when we get down to the detail of its implementation. The transparency measures will require companies to be clearer and more upfront with the figures for executive pay but there will be relief that pay ratios need not be disclosed as these could have produced potentially misleading comparisons."
Caroline Carter said: "Encouraging boardroom diversity without (at least for now) compulsory measures will be generally welcomed as will the Government's decision not to require employee representation on the remuneration committee which would have been very difficult to implement in practice."
Jonathan Exten-Wright, Employment Partner at DLA Piper LLP has broken the announcement into its chief components, adding a legal overview to each:
On shareholders' binding vote:
"Whilst The U.K. government will legislate to give company shareholders a binding vote over executive compensation, it could prove cumbersome and in particular if the package is rejected and has to be renegotiated and could even lead to deadlock. Existing contracts will need to be changed to reflect this new requirement, unless legislation is introduced to trump existing terms."
On remuneration reports:
"While certain companies' remuneration reports can be complex, it remains to be seen whether improved clarification and explanation would encourage greater shareholder activism in the setting of executive pay levels. It may invite some to adopt more simplified pay structures which could reopen the debate of how aligned these are with shareholder interests by virtue of their design. It could also mean in that case renegotiating terms."
On clawback mechanisms:
"A key aspect of Vince Cable’s announcement today is that the corporate governance code is to be revised to include a bonus clawback mechanism of executive bonuses. In reality it is it is difficult to see these as applying except in the most extreme circumstances, since it means taking back pay, and in practice actual recovery is bound to lead to disputes as to whether the claw back has been triggered and difficulties in achieving recovery of the sums paid over."