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Vince Cable hands shareholders power to tackle executive pay

Business secretary Vince Cable is expected to capitalise on the public outcry over top pay by giving shareholders a binding vote on executive pay

Vince Cable is expected to reject calls to put employees at the centre of proposals to tackle soaring executive pay as he outlines measures that will hand more powers to shareholders and demand more clarity on how multimillion pound pay deals are reached.

Forced into an earlier update on his proposals than expected because of pressure from his shadow, Chuka Umunna, Cable is expected to capitalise on the public outcry over top pay by handing shareholders a binding vote on executive pay deals and on any signing-on fees or pay offs.

Umunna was granted an urgent question at 3.30pm on Monday to demand the government announce its pay proposals to parliament first – rather than to an audience at the Social Market Foundation on Tuesday. Cable had intended to issue a written statement before that speech on Tuesday but will now respond in full to Umunna’s question.

It is thought that Cable will use his reforms on executive pay to turn the spotlight on the fees paid to remuneration consultants, who advise non-executive directors on pay scales for boardroom bosses.

He is expected to demand more clarity on the way executive pay deals are set. The High Pay Commission, which is funded by the left-leaning thinktank Compass and the Joseph Rowntree Foundation, has attacked the complexity of executive pay deals and Cable is expected to demand companies take a more simplistic approach and provide clearer information about the total take home pay.

But campaigners for sweeping reform will be disappointed over calls to place a worker on the remuneration committees that set executive pay. Cable is thought to have been convinced that such an idea is too complex to implement but will still require companies to take account of how their employees are paid. He will however call for a change in the mix of the people who sit on the board, to include academics for instance, and try to prevent the “cronyism” caused when directors sit on multiple boards.

Cable’s reforms will be the latest efforts to keep a lid on boardroom pay, an issue that has flared up regularly since the 1980s when BOC Group’s chief executive, Richard Giordano, was the UK’s highest paid director with a £271,000 pay deal. A decade later the American-born boss became the first director to be paid more than £1m when he was chief executive and chairman of the industrial gases company. In 1995, the smooth-talking and unflappable Giordano presided over a rowdy annual meeting of British Gas where a row erupted over the pay for Cedric Brown, chief executive of the newly-privatised utility. Unions took a pig named Cedric to the annual meeting to protest about the chief executive’s £475,000 take-home pay.

Giordano’s justification for Brown’s pay package still feels familiar even more than 15 years on. “There really is a ‘pay for the job’, even for chief executives,” he said. “Pay for the job which is set with reference to other executives in comparable situations. This is not a precise science, but it is certainly an established principle in industry.”

Some have blamed this practice of benchmarking for the seemingly inexorable rise in executive pay. Robert Talbut, chief investment officer of Royal London Asset Management, reckons that the spiral in executive pay has accelerated since the publication of the first remuneration reports in 2002 when Labour allowed shareholders an advisory vote on remuneration deals.

Directors were able to see other pay deals – and hence able to command ever larger pay deals.

Labour had been prompted to act by a wave of public outrage sparked by the “rewards for failure” for directors of the failed telecoms company Marconi. Another outcome of that wave of anger was to limit directors to one-year contracts and ensure that any pay offs were paid monthly, not in a lump sum, so they could be stopped if the recipient got another job.

But the vote for shareholders, which Cable is now expected to give extra importance by making it legally binding, has had mixed results. Just 18 companies have had their pay deals defeated in the decade since the advisory vote was introduced – the first was pharmaceutical company GlaxoSmithKline in 2003. The data, compiled by the shareholder advisory group Pirc, also shows that in the run up to the 2008 financial crisis rebellions again pay deals had tailed off to such an extent that not one was cast out in 2007 or 2008.

Shareholders, it seems, were prepared to tolerate high pay when the economy was going well. Cable wants to ensure that the binding shareholder vote is as effective as possible and is likely to recommend a number of votes on pay deals. Historic pay could be subjected to the current advisory vote but new pay deals and any pay offs put to mandatory votes that, it has been suggested by the fund management group Fidelity, would need a 75% hurdle. The chair of the remuneration committee would also be firing line if the vote fails.

Persuading shareholders to vote may also be difficult. Sarah Wilson, chief executive of shareholder advisory group Manifest, said: “Shareholders are not all British and some of them operating from markets where the whole approach is different”.

She partly blames the international market for executive talent for the inexorable rise in executive pay.

“Just as we have imported obesity from fast food from the US, we have imported pay obesity,” she said.

But the question about how much is too much may not be tackled by Cable. The Wall Street investment banker JP Morgan had a rule in the 1920s that the bosses’ pay could not be any bigger than 20 times the salary of junior staff. Cable is likely to only require companies to publish such pay ratios on a voluntary basis. Jon Terry, partner at consultants PriceWaterhouseCoopers, said: “What is the right figure? The fact is that because of the current economic environment we are now in, no number is acceptable anymore.”

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