Proposed UK Actions on Executive Pay

The Australian media coverage and electoral heat being generated on the subject of “equality” can have very real consequences for governance and executive remuneration matters. It was in response to populist heat on inequality that the conservative UK government initiated a Green Paper to address recalcitrant boards that pointedly did not respond to shareholder concerns on executive pay matters. There is some evidence of legitimate concerns in the UK regarding inequality of opportunity and slowdown in socioeconomic mobility. The fact that there is little evidence for this in Australia will not prevent politicians borrowing ideas to remain, or get into, government.

Given the extent that UK governance standards can filter into the Australian market, Guerdon Associates has been following proposals to legislate additional reporting requirements and change the frequency, application and/or nature of binding votes with interest (see HERE).

Indeed, recent Australian federal government initiatives to make bank executives more accountable has accentuated concerns that the government may seek out more governance initiatives, and look to the UK as a model, as it has done with the BEAR (see HERE). It may need to in order to gazump the opposition party’s policies as the next election approaches.

Fortunately, many of the excessively bureaucratic, and counterproductive UK Green Paper considerations are not to proceed. This may have been assisted by a 16% drop in realisable FTSE 200 CEO pay, board responsiveness from companies accused of prior outrages on CEO incentives, and (following Australian practices) reductions in maximum incentive opportunities. These actions and outcomes have taken the heat out of the need for tougher UK sanctions against companies that defy shareholders on pay matters.

Nevertheless, the UK Government will:

1. Change Corporate Governance Guidelines (requiring an “if not, why not” response) so that remuneration committees need to explain how pay and incentives align across the company and explain specifically to their workforce how decisions on executive pay reflect wider pay policy.

2. Require annual reporting of the ratio of CEO to average UK workforce pay 
and how and why it has changed from prior ratios.

3. Require companies to provide a clearer explanation in remuneration policies of the range of potential outcomes from complex, share-based plans. This may include scenarios assuming share price growth rates, reminiscent of US disclosure practices of the 1990s!

4. Increasing LTI shareholding periods to 5 years. We think this means executive directors, but this is not how the UK Government’s response was worded.

5. Provide and disclose, on a “comply or explain” basis, one of three employee engagement mechanisms (designated NED, formal employee advisory council or appointing a director from the workforce).

In addition, the UK Government will also engage others, such as the UK Investment Association (recording high “no” votes), the GC100 (re interpreting directors’ duties), and the FRC (revising the governance charter to indicate how companies should respond to high “no” votes) to do some of the lifting.

See the UK Government’s response to the Green paper HERE.

© Guerdon Associates 2024
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