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Shareholders now have the power to withhold the cream from fat cats.

2012 June 20
by Paul Vallely

The new rules to force companies to get authorisation from shareholders for the amounts they pay their top executives should be welcomed unambiguously. So should the move by the Business Secretary, Vince Cable, to insist that firms provide a clear single figure for the total pay that directors received for the year – including pay, pension contributions, bonuses and long-term incentive payments. So-called “golden handshake” pay-outs when an executive exits a firm must now also be spelled out in advance.

Excessive pay for fat cat business leaders has been one of the scandals of the crisis in modern capitalism. The chief executives of the top 100 FTSE companies last year each earned an average of £4.2 million in basic pay, bonuses, share incentives and pension contributions. That is a rise of more than 400 per cent in just over a decade. The ordinary board members of those companies netted a whopping 49 per cent rise last year alone. All this is happening as average wages stagnate and ordinary people lose their jobs.

Nor can businesses claim that these mega-rises increases simply reflect improved performance. The average pay of FTSE 100 bosses rose 13 times more than the value of the companies they ran in the decade to 2010.

Shareholders have finally decided to act on this. There have been a series of investor rebellions in recent months at companies including Barclays, AstraZeneca, Aviva, Trinity Mirror, Xstrata and most the advertising giant WPP where a 30 per cent pay increase for the boss Sir Martin Sorrell was voted down. But their votes currently only have the status of “advice” to their boards.

The need for such votes to be binding was illustrated by the fact that the WPP board recommended the £6.8m pay deal for Sir Martin despite the fact that 42 per cent of its shareholders voted against WPP’s remuneration report the year before. Some have accused Mr Cable of diluting the measures by requiring a vote every three years rather than annually. But that was a sensible change. Annual votes might have destabilised management teams and encouraged short-term thinking. In any case the previous annual executives pay round clearly led to an unwarranted ratcheting up of remuneration.

Shareholders will soon have the tools they need to curb excessive executive pay. They should use them.

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