March 28, 2014
The United Kingdom's chief securities regulator, Vince Cable, has threatened companies and investors with a host of new measures aimed at curbing executive pay in the UK, including employee votes on executive pay, unless they embrace "the spirit" of a newly minted executive pay disclosure which requires companies to discuss how they considered the pay of their workforce while setting executive pay levels. Cable's March 26 remarks came in response to a formal complaint filed with the government by a UK investor coalition led by groups such as the High Pay Centre and a group representing city pension funds who suggested that companies are not following the requirements of the new disclosure. In response, Cable complained that companies are "observing the letter of the law but ignoring the spirit" and threatened new rules including "stricter regulatory oversight of pay reports and policies, a requirement on shareholders to disclose how they have voted on pay, or a requirement [for companies] to consult employees [on executive pay]." The 2014 proxy season for UK companies marks the first year of compliance with a revamped executive compensation reporting regime which includes two say on pay votes, including a mandatory, forward-looking, and binding vote. In anticipation of that vote, companies are required to disclose how the company considers the pay across its entire workforce in deciding executive pay levels. The disclosure, like the pay ratio disclosure here in the U.S., was aimed at addressing perceived problems in the UK with income inequality. However, the requirement quickly came under fire from certain investors for allowing companies to define the population of employees used for the comparison and the compensation being compared (i.e. salaries of workers compared to executive salaries, not total pay). The reaction by UK investor activists to the flexibility provided to UK companies is notable and could offer insight into the reaction U.S. investor activists could have upon the implementation of the Dodd-Frank pay ratio, depending on the SEC's final rule. However, unlike in the UK where activists have the ability to push regulators (or regulatory threats) to encourage action, in the U.S., activists unhappy with how the pay ratio develops as a disclosure are more likely to use other tactics (e.g., shaming in the media) to urge companies to implement the changes they seek.