Lawyers call for caution after Cable's executive pay reform proposals

Lawyers have urged caution in the wake of Vince Cable's proposals to reform executive pay, with some warning that popular pressure to curb business leaders' salaries could result in knee-jerk legislation.

The Business Secretary's proposed reforms, announced earlier this week, include the suggestion that investors are handed a binding vote on directors' notice periods and exit payments, while other proposals could see a clawback mechanism for executive bonuses.

Cable is also pushing for an increase diversity on company boards, calling for more lawyers to be appointed to leadership roles as well as public servants and academics.

DLA Piper employment partner Jonathan Exten-Wright said that giving investors a vote on executive pay packages "could prove cumbersome", warning: "If the package is rejected and has to be renegotiated [it] could even lead to deadlock."

Executive bonus clawback would probably be applied only in the most severe circumstances, he added, concluding: "In practice, actual recovery is bound to lead to disputes as to whether the clawback has been triggered and difficulties in achieving recovery of the sums paid over."

Other lawyers warned of the potential negative effects of the proposals, with Withers employment partner Elaine Aarons commenting: "Who will be a director? Directors' duties have been very aggressively extended over a period of time and being a director puts individuals at risk of criminal and other serious liabilities.

"We have already seen an increase in the number of those not prepared to assume these duties. There is no doubt that a factor which attracts those prepared to take on these duties is the remuneration package. Make that significantly less attractive, and who will be prepared to step up to the plate?"

Pinsent Masons corporate governance head Martin Webster added: "The devil is going to be in the detail. The principles the government has announced may enjoy a large measure of support but their implementation needs to be thought through and handled with care. If it is rushed, the outcomes could be severe."

Esther Smith, an employment partner at regional firm Thomas Eggar, called the debate "inherently political", saying it is inextricably linked to cultural and institutional issues.

For this reason, the package of proposals - which also includes calls for companies to explain how executive pay compares to profits and dividends - is likely to be watered down before entering legislation.

Cable has already been forced to shelve controversial plans to require companies to publish pay ratios showing the gulf between the earnings of the highest and lowest paid members of staff.

Addleshaw Goddard employee incentives group head Michael Carter said the proposals will require significant development if they are to function as envisaged. However, he called the package "potentially very significant", saying: "They should provide shareholders with all of the necessary tools to properly hold companies and their remuneration committees to account."

More reaction to the proposals

"In the UK we have freedom to contract and this governs executive pay and conditions. The proposals are well intentioned and read well, but without a central constitution or income policy, the government has no real ability to affect executive pay, apart from via indirect routes such as taxation. It will take several years to effect cultural change, and in a financial sector which is truly international, any UK company which forges ahead with these proposals might find itself at a disadvantage."
Tom Flanagan, national head of employment, Irwin Mitchell

"The announcement is full of political theatre but rather short on substance and we will have to wait and see how the government intends to implement the proposals before understanding their full impact. Some aspects, such as those requiring greater transparency and reporting of executive pay, will be relatively easy to implement, although whether they will change behaviour and attitudes is more open to question. Legislation rarely achieves that over the short term.

"Among the areas of concern for lawyers advising both companies and executives is the proposed entitlement to claw back bonuses where the company later does badly. It is not at all clear how that will work in practice from a contractual perspective? It potentially drives a coach and horses through contractual principles of certainty.

"Sadly too often political gestures have been implemented into law with unworkable legislation and bad drafting, which increases costs for business without the desired goal of more effective regulation, and it is hoped that the government does not rush into changes without ensuring that they work properly."
Richard Linskell, employment partner, Speechly Bircham

"Despite all the clamour for transparency on pay in general, and on diversity in the boardroom, we have not seen much change over the years. So while the government's proposals receive a widespread welcome, it must be recognised that it will take some time to bring in change. Existing contractual entitlements cannot be altered unilaterally or overnight. But change is clearly coming and those who are ready to embrace it are likely to be best served by it."
Rachel Dineley, partner and head of equality and discrimination, DAC Beachcroft

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