UK laws on pay disclosure are changing. This may directly impact Australia’s disclosure requirements, as they borrowed from earlier UK provisions. In addition, the UK changes would seem tailor made for the current Australian political environment.

Australian political will to take action has probably been turned up a notch in past weeks. Originally Nick Sherry, the Minister for Superannuation and Corporate Regulation, signaled that the government was reviewing regulations to implement its election platform (see HERE). Then the financial crisis spurred Prime Minister Kevin Rudd and Treasurer Wayne Swan to commit to additional change regulated by APRA (see HERE). Their focus on executive pay found an unlikely ally in the form of the Leader of the Opposition, Malcolm Turnbull. Mr Turnbull’s ill-conceived comments last week (see HERE) received support from Julia Gillard, the Deputy Prime Minister. On Friday, Prime Minister Kevin Rudd told Melbourne Radio 3AW that executive remuneration restraints may be necessary.

On Saturday, the Sydney Morning Herald cited a UMR poll indicating that ninety-two percent of 1,000 voters polled last week thought chief executives were overpaid and 72 percent thought the government should regulate their salaries (the paper did not provide a margin of error).

So, having committed themselves to change, the media, the electorate and the politicians themselves may not want to countenance waiting for the G20 to endorse a regulatory framework recommendations from the IMF and FSF in April. But, the potential for political mileage beyond this will decrease as remuneration reports are published showing that indeed executive remuneration has declined with shareholder returns.

The UK regulation is seemingly innocuous in a practical sense, but capable of being tuned to meet the political need for action.

News of the UK change came to light as a result of a question in the House of Lords. Lord Wedderburn, Emeritus Professor of commercial law at the London School of Economics, had raised the issue of executive pay when he asked the deputy chief whip, Lord Davies of Waldhiem, what advice the Government had given to companies in the private sector on pay increases and what controls they proposed to introduce. The following are amongst the comments Lord Davies made in reply to Lord Wedderburn and others (see HL Hansard, 30 October, col 1683):

“… pay levels in private sector companies are a matter for those companies. The Government have consistently made it clear that there should be effective linkage between pay and performance and that exceptional rewards for mediocre performance are not in the interests of companies, their shareholders or the United Kingdom as a whole. …

“On the more general issue of companies, from 6 April next year, a new provision will require quoted companies to report in their directors’ remuneration report on how they have taken pay and employment conditions into account when setting [executive] directors’ pay. Directors’ pay should be set only by non-executive directors, not by those who benefit from it themselves”.

The new provision referred to by Lord Davies was introduced via UK Companies Act regulations (See the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. Regulation 11)

This requires the remuneration reports of quoted companies to contain certain information (See paragraph 4 in Schedule 8), including:

“Statement of consideration of conditions elsewhere in company and group: The directors’ remuneration report must contain a statement of how pay and employment conditions of employees of the company and of other undertakings within the same group as the company were taken into account when determining directors’ remuneration for the relevant financial year”.

Regulation 2 (see HERE) provides that the foregoing statement is required in respect of remuneration reports for financial years beginning on or after April 6, 2009.

While the rationale for the changes is not given, it appears that they relate to significant criticism that executive pay levels and increases are too divorced from the pay and increases of other company employees. In the UK this is typically portrayed in the context of remuneration increase rates. In the US it is usually portrayed in terms of the multiple of the average company employee’s pay.

A similar change could be easily inserted into Australia’s Corporations Act, section 300A.

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