Investors should get a bigger say on executive pay, says IoD

The government should give investors a bigger say in executive pay in the UK’s biggest companies, directors have urged.

The Institute of Directors said that if 30% of investors oppose a directors’ remuneration report at an annual meeting, the company should have another look at its pay policy and allow shareholders a second vote.

The IoD said that despite some high profile rebellions in recent months, executive pay is still usually waved through at annual shareholder meetings.

There could be further pay rebellions at the ITV, Barclays and Aviva annual general meetings on Wednesday and at the Prudential’s meeting next week.

The next government should take action to force stock market listed firms to give shareholders a second vote if a significant minority rejected a pay report, said the IoD.

Oliver Parry, the head of corporate governance at the IoD, said: “UK company boards have been put under unprecedented scrutiny in recent months, with the government and the House of Commons business committee suggesting reforms to executive pay and the governance of private companies.

“UK corporate governance is highly regarded across the world, but there is still a pressing need to rebuild public trust in big business to work in the long-term interests of investors and employees, rather than the short-term interests of managers.”

Education group Pearson was the latest firm to suffer a pay rebellion. Last week more than two-thirds of investors voted against the group’s pay report after the company paid a bonus of £343,000 to chief executive John Fallon despite the business posting the biggest loss in its history.

There have also been rebellions at Crest Nicholson, AstraZeneca, Thomas Cook and Ladbrokes Coral earlier this year.

The Commons business, energy and industrial strategy select committee is calling for a crackdown on excessive remuneration as part of a widespread review of corporate governance.

A report by the committee, published last month, said executive pay had been “ratcheted up” to the point where there is no credible link between earnings and performance.

It said faith in corporate governance had been shaken in the wake of scandals such as that involving Sir Philip Green and the BHS pension fund, and has called for businesses to simplify the structure of executive pay and put an end to long-term incentive plans.

Their recommendations include workers on remuneration committees and for the chairs of these committees to be expected to resign if shareholders reject their proposed pay policy.

The committee has also backed publishing pay ratios annually.