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Government to "get tough" on excessive boardroom pay

08/12/2011
In an interview with the BBC this week, Nick Clegg stated that the government will publish new proposals to "get tough" on excessive boardroom pay in January. Mr Clegg remarked that the public sector In an interview with the BBC this week, Nick Clegg stated that the government will publish new proposals to "get tough" on excessive boardroom pay in January. Mr Clegg remarked that the public sector could not be seen to do all the "heavy lifting" when it came to the government's austerity programme and the private sector should also be held to account. Mr Clegg's comments came shortly after The Daily Telegraph reported that Lloyds Banking Group plans to claw back up to 50% of the bonus paid to its former chief executive Eric Daniels and other senior executives at the bank.

Research published by Income Data Services (IDS) in October this year revealed that FTSE 100 directors have seen their total earnings increase by an average of 49% in the last financial year, to an average of £2,697,664 per annum. Average bonus payments have increased by 23%, from £737,624 in 2010 to £906,044 in 2011.

So how does the government propose to curb excessive pay and bonuses? Nick Clegg made it clear that the government will not be setting pay rates, but he considers pay should be linked to performance and executives should be well rewarded if their companies are successful. In September 2011 the Government published a discussion paper regarding executive pay. Practical measures suggested by the government included:

• improving pay transparency;

• improving the link between pay and performance by choosing more appropriate measures of performance;

• making shareholder votes on executive pay binding. Currently shareholders are only entitled to an advisory vote on directors' remuneration;

• greater shareholder involvement in scrutinising directors' service contracts to prevent executives leaving failing companies from benefitting from substantial exit packages;

• inviting independent shareholders to join remuneration committees without requiring them to become full non-executive board members; and

• inviting employee representatives to sit on remuneration committees.

The CBI have commented that they consider the pool of non-executive directors on remuneration committees should be widened. However, they are strongly against the inclusion of employee representatives or independent members, who they consider would add little to the process in comparison with a non-executive who has the advantage of being an elected shareholder representative, has an understanding of the business thanks to being on the board and experience of the kind of challenge that is required.

In contrast, the TUC believe reform should start with employee representation on remuneration committees, which they consider would give directors a much-needed sense of reality. However, as commented by Lee Harding in his blog post on 22 November, this could cause potential conflicts of interest for directors and may have some unintended consequences.

In his BBC interview, Nick Clegg said that shareholders often have their opinions ignored and should be given a proper say. He also stated that remuneration committees were too often "old boys' clubs" and he wanted to break open the membership of these bodies. Exactly how the government proposes to achieve this remains to be seen. However, the Labour Party want workers to have a seat on remuneration committees and Nick Clegg's comments suggest that this may be a likely step.

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