An annual binding vote on executive pay by employees, consumers and shareholders are among the proposals included in an independent report released by the UK’s Labour Party this week, as executive pay in the United Kingdom was again thrust back into the spotlight. The report, which suggests several radical changes to UK executive pay and governance processes, was released at the same time as another annual report noting a weakening of the link between FTSE 100 company performance and executive pay as well as the release of updated executive pay guidelines by the UK’s Investment Association, the industry group representing large UK investors.
The Labour Party report was immediately met with scathing feedback from UK Industry groups for several of the suggested changes which include full employee compensation disclosures for the highest, lowest, and median paid company employee, including a full gender and ethnic breakdown of each category. The binding say on pay vote requires 50% participation by all stakeholders and increased Director responsiveness if the company receives less than 80% support. Additionally, the report suggests requiring companies to disclose all employees earning more than £150,000 bracketed in increments of £10,000 and further broken down into gender and ethnicity. The report also advises that stakeholders be given a vote to establish a cap on executive pay which could be based on several things, including multiples of the pay ratio. Business groups in the UK lambasted the report, characterizing it as half baked and unworkable.
Meanwhile, after a tumultuous 2019 proxy season which saw several high-profile UK companies see shareholder rebellion over pay, the UK’s influential Investment Association updated its executive pay guidelines. The updated guidelines seek to remind entities that say on pay is not a “validation exercise” but rather a means of “obtaining and understanding the views of the company’s major shareholders”. The four guidelines had four primary updates:
- Executive pension contributions should be in line with the rate given to the rest of the workforce;
- Clawback triggers should be broadened beyond ‘gross misconduct’ or financial restatements.
- Executives should be required to hold a proportion of equity for two years post departure;
- Companies should provide a pay ratio disclosure to "ensure that there is accountability for high levels of pay internally".
Given the current conservative control of the UK Government, none of these reforms are imminently headed for implementation. However, the Labour report garnered both a response and serious attention given that the Labour Party nearly secured a majority during the last UK general election and rumors are swirling in London of the potential for another general election in the coming months which could shift power away from Theresa May’s conservative party thus putting the Labour party in position to pursue further executive pay reforms.