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The Government has given its outline response to its consultation on executive remuneration published in September last year (see our Herbert Smith corporate e-bulletin 2011/266 for more details).

The response was set out in a speech given by the Secretary of State, Dr Vince Cable, on 24 January (having been confirmed in a similar ministerial statement made in Parliament on 23 January). The Government has also published a summary of the responses received to the September 2011 discussion paper.

There is as yet no detail beyond these statements, and the proposals are still subject to detailed consultation before regulations can be put forward. Dr Cable stated that BIS will be consulting "in coming weeks" to take these proposals forward. It is not currently clear when any of the proposals would be brought into force.

The Government's proposals to tackle the issues they have identified in relation to executive remuneration fall into four areas:

Greater transparency - The Government is proposing that remuneration reports should be split into two sections. The first section of the report will set out the company's proposed future pay policy and should explain why specific benchmarks were used, how employee earnings and employees' views were taken into account when structuring the policy, how performance will be assessed and the performance criteria for bonuses. Any exit payment arrangements will also need to be disclosed. The second section of the report will detail how the pay policy was implemented over the last year and should include details on how pay awards relate to the company's performance and outline how executive pay compares with other distributions made by the company (for example dividends, taxation and its general wage bill).

Increased shareholder power - The route favoured by the Government is to give shareholders a binding vote on the company's future pay policy and making any directors' notice period longer than one year and any exit payments of more than one year's basic salary subject to shareholder approval. The Government wants to consult on whether the requisite shareholder approval level for the binding vote on future pay should be 50% or 75%. Shareholders would also vote on the implementation of the pay policy over the last year, as they currently do through their advisory vote on the remuneration report. The Government accepts that there would be problems if this latter vote was made a binding vote but wants to explore what sanctions could be applied if the resolution receives a significant number of votes against. The Government also wants the Financial Reporting Council to consult on amending the Governance Code to require all large public companies to adopt clawback mechanisms so that pay can be clawed back in the event that performance "has not lived up to expectations".

Reform of remuneration committees - The Government is proposing that executive directors should be prevented from being members of remuneration committees of other large companies. It wants to see more diverse boards and, for example, mentions that more needs to be done in the drive to increase the number of women on boards. The Government also wants companies to be more transparent about their arrangements with remuneration consultants.

Developing best practice - The final proposal is for a High Pay Centre to be established, to be headed by the chair of the High Pay Commission, which will work to monitor board pay.


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