Corporate law: Institute warns that plans to curb directors’ pay will be a legal minefield

Corporate law: Institute warns that plans to curb directors’ pay will be a legal minefield

David Cameron’s plans to grant shareholders the power to veto directors’ salaries and bonuses has come under attack from business leaders who say that the plans will be almost impossible to implement, and will fail to influence businesses in the correct way.

Last week Mr Cameron announced plans to end the culture of executives “patting each other on the back whilst handing out each other’s pay rises”. To do so Mr Cameron announced plans to hand shareholders in businesses a vote on top pay packages, and on payments for failure.

However the Institute of Directors, which represents many of the UK’s top executives in both large and small businesses has hit back, saying that the plans would create swathes of litigation and could hinder companies when they search for the best candidates for the top jobs.

“It wouldn’t be practical, or a good idea after the remuneration committee has set pay and bonuses, not just from a legal point of view but recruitment as well,” said an IoD spokesman.

“Government concern on this issue is understandable, but prevention has to be the answer. Binding shareholder votes would be shutting the stable door after the horse has bolted as shareholders would only be voting after the problem has happened,” said John Cridland, the Director-General of the Confederation of British Industry.

Lawyers have explained that the changes could be achieved by adding a clause in future employment contracts stating that pay was subject to shareholder approval. However, they warn that should shareholders reject director pay, the likelihood would be more litigation as directors would undoubtedly seek reasons for the rejection.

“The taxpayer-backed banks would then be spending tax-payers’ money defending their decisions to reject director pay packages, which undermines the point of this reform,” said Tom Flanagan, employment law partner at law firm Irwin Mitchell.

Business Secretary Vince Cable is thought to be devising plans at the moment to force company bosses to publish a single figure for their total pay, including salary, bonuses, long-term share options, pensions and other perks.

The plans would also see companies publish the difference between their chief executive’s total pay, and that of a typical worker in the company, and are thought to be being scheduled for announcement in the next Queen’s Speech coming up in the spring.

Related links:

Read more on the story (The Telegraph)

Performance-related pay (FindLaw)

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