UK exec pay reforms set sound standards

June 21, 2012

By Christopher Hughes

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The UK government has decided on just the right amount of meddling in executive pay. It had to respond to mounting public disquiet about perceived outsize awards for company bosses. Its final reforms on the issue, published on June 20, correctly focus on giving company owners more power to hold boards to account.

The forthcoming legislation is welcome and hardly radical. Shareholders will have a binding vote on overall remuneration policy, including pay-offs, every three years, and an annual advisory vote on how the policy was implemented in the past year. That leaves boards with a lot of wiggle-room in how they pay directors. Neither government nor investors will get to dictate the amounts awarded.

Equally sound is the obligation on companies to give a single number for what each director is paid in any one year. Even blue-chip companies often fail to provide this, but it is hugely useful given the various moving parts in executive compensation. Greater comparability here can only make the so-called “market for talent” function better.

Take Anglo-American, the miner. It gave numbers for Chief Executive Cynthia Carroll’s basic salary, cash bonus, benefits and pension in 2011. But there was no headline value for the estimated value of the share component of her annual bonus or her long-term incentive plan (LTIP), which pay out if performance targets are met. A pie chart broke down her overall package between fixed pay, annual bonus and LTIP, in theory enabling investors to reverse engineer the specifics, but even then it wasn’t clear exactly what the chart deemed “fixed pay”.

Pension accruals and conditional share awards typically make up a large share of annual pay. These may not have a fixed worth, but they represent value leaving the company to the executive. And it is perfectly possible to estimate their quantum.

The UK reforms have been much criticised. But they go as far as they need to and shouldn’t limit pay for top performers. To the contrary, transparency and shareholder approval will make such awards easier to defend.

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