UK - Shareholders will be able to veto unmerited salary rises for directors under new regulations which are due to become law by the end of the year.
The regulations – which will allow shareholders annual votes on directors’ remuneration – are an amendment to the Companies Act 1985.
They were announced by the DTI last month and are open to consultation until March 15. The regulation is expected to take effect from December 31, 2002.
A DTI spokeswoman said: “Directors face a conflict of interest when they become involved in deciding their own pay.
“The requirements will improve transparency and help protect the integrity of both individual directors and companies.”
Under the proposals, quoted companies must produce details of performance criteria for long-term incentive schemes and include graphs showing how the company has performed over a five year period in comparison with selected competitors.
Greater disclosure on directors' contracts and compensation payments will also be required.
Hermes Pensions Management’s director of corporate governance, Michelle Edkins, speculated that under the new law most quoted companies’ remuneration reports would be accepted by shareholders.
Edkins said the highly publicised criticisms of directors who have been richly rewarded while running poorly performing companies did not reflect the situation at most quoted companies.
She emphasised: “I hope this will bring a more intelligent debate between companies and institutional investors on pay issues – not on pay amounts – and the structure of pay schemes.”
Edkins predicted that company boards would now become more mindful that there would be a formal review of what they have done over each financial year and would harder to ensure that pay schemes are working in the interest of the owners of the company.
NAPF investment council chairman Alan Rubenstein welcomed the regulations. He said: “Well structured and forward looking remuneration committee reports should provide shareholders with a sound basis to form a judgement on whether a company’s board has adopted a policy that will assist them in promoting long term growth.”
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