The Business Secretary Vince Cable has revealed that the UK Government is to introduce laws which would give company shareholders a veto over executive pay decisions.
The move comes at a time when shareholders are growing increasingly frustrated with the levels of director salaries and bonuses at FTSE 100 companies, which have quadrupled over the past 10 years, despite the modest performance of the businesses concerned.
At present shareholders only have an advisory role on executive pay; they can vote to voice their opinion but it is not binding.
Speaking to announce the legislation, Mr Cable pointed to the unsustainability of current director remuneration.
"At a time when the global economy remains fragile it is neither sustainable nor justifiable to see directors' pay rising at 10% a year while the performance of listed companies lags behind and many employees are having their pay cut or frozen," he said.
The European Union is currently considering similar proposals to increase shareholder control on director pay. Meanwhile across the pond, director salaries in the US have also suffered a slowdown although increases averaged some 14% last year.
Businesses have reacted with caution to the news, emphasising that remuneration is a matter for companies themselves and not governments.
Mark Boleat is the Policy Chairman at the City of London Corporation.
"High pay for success is perfectly acceptable, it is high pay for failure that needs to be addressed," he said.
Mr Cable revealed that the plans will see shareholders given a vote to approve director remuneration and could be introduced next year. Companies will be given the option to limit shareholder votes on remuneration to happening once every three years.
Labour criticised the decision to limit votes to once every three years, but Mr Cable responded saying that the law would encourage companies to adopt long-term strategies on pay and would help put an end to the annual 'upward pay ratchet'.
Investors have welcomed the plans, saying that they look 'practical' and 'workable' and the Confederation of British Industry also backed the plans.
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