The government’s plans to give shareholders regular binding votes on executive pay have met with a mixed reaction from experts.

In Parliament, business secretary Vince Cable said shareholders will vote for or against their company’s remuneration plans every three years, even if policies had remained unchanged during that time. More frequent changes to senior reward would trigger an annual binding vote, he added.

This new power for shareholders is the government’s attempt to tackle the escalation of executive pay that has seemingly become disconnected from the value of shares or employees’ average wages. The vote is also to encourage boards to pursue a more long-term and transparent approach. But what will this mean for employers, and will it have the desired effect?

Additional scrutiny will mean more work for everyone involved, according to Katharine Turner, practice leader for executive compensation at Towers Watson. She said: “We will see more to-ing and fro-ing and engagement between companies and shareholders. There will be less frequent change, and I hope to see greater simplicity of reward design.”

Charles Cotton, CIPD performance and reward adviser, was more sceptical about the potential results of the policy. “I’m sure that in a few years’ time something else will have to be brought in because it’s not having the desired effect,” said Cotton. A number of reward issues have become confused in the calls for vote reform, he added. These include the wish to address “rewards for failure”, the need to better link pay to performance and a general distaste for excessive pay. But he said high levels of pay may be justified, depending on the level of performance. “Someone could do very well, receive a high salary or bonus, but people would still be up in arms about the amount,” said Cotton. “Should you then respond: ‘Well, that person did what they were asked to do.’?”

Sophie Black, partner in human capital at consultancy Mercer, said that she foresaw “substantial operational difficulties” with the system. “Companies are going to have to be much clearer on how reward links to the performance of the company. They will actually have to demonstrate it, and show over a period of time what’s been paid out and how that tracks the performance of the company.”

Black said having compulsory votes every three years, rather than annually, was a “substantial watering-down” of the policy, although she conceded the longer gap between votes could ease the problem of what to do when shareholders reject a reward policy with a 50 per cent vote against.

When the vote goes against a policy, the company has 90 days to put alternatives forward. One concern is that 90 days might be too short a time for a company to devise an alternative policy and call another shareholder meeting, which might force it to revert to the pre-existing structure. If this were the case, companies might miss the opportunity to make changes they see as essential, and policies could end up being more static, she said.

Black questioned the need for a binding shareholder vote in the face of the growing “shareholder spring” that has made good use of the existing advisory votes. This wave of votes against top remuneration plans has already claimed high-profile victims, such as former Aviva chief executive Andrew Moss, who resigned after a vote against his reward package. Other casualties include chief executives Sly Bailey of Trinity Mirror and David Brennan of AstraZeneca. Black said: “We’ve had the advisory vote since 2002, and it’s only in the past year since the government has been threatening the binding vote that we’ve see shareholders really exercise it.”

Annual advisory votes will continue alongside the binding vote, letting shareholders give their opinions on how pay policy was implemented in the previous year, including the sums paid to directors. If a firm fails the advisory vote, it must put its overall pay policy to shareholders in a binding vote the following year. Turner added that she was staggered by how similar senior pay looked throughout British industry, and that companies ought to be free to develop more diverse approaches.
 
“Perhaps the right answer is that shareholders stand back and let boards do what is right for them,” she said. Reforms will shortly be included in the Enterprise and Regulatory Reform Bill, with changes coming into force by October 2013.