Brussels says shareholders should decide executive pay

Investors should be in charge of how big the gap is between directors' pay and average salary in a company. Businesses won't be happy.

by Emma Haslett

Let’s face it, the European Commission isn’t on many business’ Christmas card lists – but it’s just about to make itself even less popular, after it published plans to give shareholders the responsibility for executive pay.

Under draft reforms published this morning, shareholders will not only approve maximum pay and bonus levels for directors, as well as the ratio between director pay and the average pay of a company’s full-time workers, but they also have to justify why their decisions are ‘appropriate’.

This all comes out of 2012’s ‘shareholder spring’, during which investors did battle with the boards of the likes of Barclays and Aviva. Theoretically, it’s not a terrible idea: shareholders are, after all, as interested as the rest of the business in attracting the best talent, but they’re also the first ones to be hit when things go bad, so they have a vested interest in making sure pay is at an appropriate level.

But at least 10 EU member states – including the UK, Sweden, Belgium and the Netherlands - already have rules on executive pay. In 2012 business secretary Vince Cable announced plans to force companies into having binding votes every three years, then stick to them or have another shareholder vote.

The trouble is, the EC may have a point: in France, the average pay of directors rose 94% between 2006 and 2013, while the average share price fell by a third. And shareholders aren’t happy with the latest headlines from BP - CEO Bob Dudley’s pay tripled in 2013 to $8.7m (£5.2m). BP said it was because of ‘strong and sustained performance which safety steadily improving’ - but oil and gas analyst Neil Morton retained his ‘hold’ recommendation on BP shares.

The good news is that, after all the negotiations required by the EU, the rules are unlikely to be agreed until late 2015. So bosses of the EU’s 10,000 listed companies can rest easy – for now…

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