Shareholders should be given a binding vote over how large British companies manage executive pay and more companies should be able to claw back cash from highly-paid staff who fail to deliver, Business Secretary Vince Cable said on Monday.
Firms should also need 75 percent of shareholders to agree to any pay proposals, Cable told parliament, announcing measures to improve executive pay policy at Britain's biggest companies.
Big bonus payouts at Britain's banks - and large pay rises for bosses at other firms - have sparked a public and political backlash over perceived excess in executive pay, at a time when the economy is stalling and many workers are enduring negligible pay increases or wage freezes.
The Conservative-Liberal Democrat coalition has pledged to clamp down on out-of-control pay culture, although ministers are wary of pushing too far with regulation, for fear of driving talent away from Britain's top companies.
No proposal on its own is a magic bullet but together they can enable a major transformation to get under way, Cable told parliament.
Shareholders need new powers to hold the board (of companies) to account and I will consult shortly on specific proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards, he said.
The binding vote will cover how directors' performance is judged and the scope of potential payouts. The government will also extend to all big firms a requirement for contracts to include clawback mechanisms -- not just in financial services.
Simon Wong, a partner in corporate governance watchdog Governance for Owners said moves to explain how pay structures reflect and support company strategy were welcome but investors would need to develop the capacity to assess the merits of individual arrangements instead of standard performance metrics like earnings per share.
Trade unions, some representing millions of public sector workers who have had their pay frozen as part of Britain's budget deficit reduction plan, complained that Cable's much-hyped proposals had not gone far enough.
Ministers have spectacularly failed to make any significant changes to the status quo, said Brendan Barber, general secretary of the Trades Union Congress umbrella organization.
Whilst the business secretary has announced a few welcome tinkers to current boardroom pay regime, he has shied away from the big decisions on all of the major proposed reforms, from worker representation to company pay ratios and open advertising for posts on remuneration committees.
Barber's views echoed those of Alan MacDougall, managing director of proxy agency PIRC, who said real change depended on asset managers using their new powers responsibly.
..If the strongest emphasis is put on giving shareholders better information and more powers then a huge amount rests on the voting decisions of asset managers. With notable exceptions, their recent voting behavior does not lend confidence that they will shoulder the burden effectively, he said.
Sacha Sadan, director of corporate governance at Legal & General Investment Management, said public confidence in executive pay would only be restored if the basic principles of simplicity, transparency and alignment were applied.
Pay and especially bonuses need to be aligned to the long-term interests of shareholders and executives themselves should own a meaningful amount of shares in the company, Sadan said.
Cable, a Liberal Democrat, said he wanted to engineer greater diversity on the remuneration committees which decide executive pay, but fell short of making it compulsory.
Speaking on BBC radio following his speech to parliament, Cable conceded that the proposals were unlikely to stir immediate or sweeping reforms.
I don't think anyone's going to be terrified but I think what they will recognize is that this is the beginning of serious change of culture in the business community and in executive pay, Cable told BBC radio.
Britain's big state-supported banks - RBS
We've made it very clear that we do expect to see restraint in bonuses in the banking system - and RBS in particular - and we will see what happens, Cable said.
The government says FTSE 100 CEO pay increased by an average 13.6 percent per year between 1999 and 2010, compared with an average increase of 1.7 percent on the FTSE 100 index itself.
(Additional reporting by Sinead Cruise; Editing by Mohammed Abbas and Helen Massy-Beresford)