Business secretary Vince Cable has announced reforms to directors' pay, which would grant shareholders greater powers in setting remuneration policies.

In reforms announced today, shareholders will receive a binding vote on pay policy and exit payments, to be held annually unless the company chooses to leave its remuneration policy unchanged in which case the vote will be held every three years.

Exit payments will also be subject to the binding vote.

In addition, shareholders will continue to have an annual advisory vote on how pay policy was implemented in the previous year, including actual sums paid to directors. If a company fails the advisory vote it will be required to put its overall pay policy back to shareholders in a binding vote the following year.

Companies will have to report a single figure for the total pay directors received for the year, covering all rewards received. Companies will also have to report details of whether they met performance measures and a comparison between company performance and chief executives’ pay.

Announcing the measures, Cable said it was neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year in the current environment.

“In January we kicked off a national debate aimed at encouraging shareholders to become more actively engaged as company owners in better aligning directors’ pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained. That is why I am bringing forward legislation to strengthen the powers of shareholders through a binding vote on pay.”

National Association of Pension Funds head of corporate governance David Paterson said a binding vote could help allay shareholders’ concerns over boardroom pay being increased in “a could of complexity”.

Measures around reporting a single figure for director remuneration and the detail of exit payments were also welcomed.

“This is an opportunity for everyone to rethink pay policies and to aim for restraint, simplicity and transparency. The goal must be to better link pay and performance, so that it can be explained and justified.

“The reforms should help bring about a much-needed cultural change. They present a challenge to companies and investors as there will be a need for better communication by both,” Paterson said.

The government intends for the reforms to be enacted by October 2013. Further detail is available here

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