Hewitt won't change 'fat cat' rules

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Patricia Hewitt has decided not to take further action to prevent "fat cat" pay awards for senior executives.

Explaining the decision, Hewitt said that new rules were unnecessary, as rules already introduced, (the Directors' Remuneration Report Regulations 2002), had already had "a positive impact."

This, said Hewitt, was underlined by a report, commissioned by the government and written by Deloitte & Touche, that specifically addressed the issue.

In a statement, Hewitt said "the regulations we introduced in 2002 have delivered a substantial change in behaviour. We are now seeing higher levels of compliance by top British companies, improved disclosure of directors' pay and rewards and better engagement with shareholders," adding,

"The UK now has a corporate governance framework for directors' pay that leads the world in terms of transparency and accountability."

The purpose of the 2002 regulations was:

  • "to enhance transparency in setting directors'pay"
  • improve accountability to shareholders, and
  • to provide for a more effective performance linkage

The purpose of the report was to assess the extent to which the regulations were being complied with, whether remuneration policies have changed in the light of those regulations and to identify areas requiring further improvement. The focus of the report was companies within the FTSE 350.

Among its findings were that:

  • Whereas previous to the introduction of the rules, few companies put their remuneration report to a separate vote at the AGM, this requirement is "now being complied with fully."
  • As to whether companies are "correctly disclosing what the Regulations require in the remuneration report," it finds that a number of areas exist where compliance is weak, including the reasons for choosing performance conditions for share options and other incentive plans, the methods used to assess whether performance conditions have been met, and disclosure of future possible termination payments.
  • With regard reporting on the link between remuneration and company performance, it found that while this could be improved, "the process may be best encouraged by further development …of best practice guidelines," and not by changing the rules.

Changes that the report says have occurred since the introduction of the regulations include the reduction in directors' notice periods to one year or less, the removal of the opportunity to re-test performance conditions in share options plans, and insistence that performance be taken into account in the vesting of share options.

Unions, however, among the most stringent critics of directors' pay awards, were not mollified. The TGWU said the no-change policy was proof that the government "had given compay 'fat cats' another life…by giving the clearest indication yet that they have bowed to pressure from big business."

The TGWU's general secretary Tony Woodley said, "Our members are expected to take cuts to their pensions and work harder and longer, yet British directors continue to cream off the profits. This is not just about shareholder confidence but it is also about social justice, good business practice, and industrial relations…The fat cats have just been given another life. A Labour government should not be afraid to act."

Deloitte & Touche have recommended that the government revisit the issue within two years.

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