Executive pay: power to the shareholders?

Published: 6th Sep 2017

In brief


The Conservatives gave shareholders the power to veto pay policies.


The Coalition government did this in 2013, although these powers didn’t extend to actually setting directors’ pay packets for the preceding year.


Theresa May has broken a pledge to make shareholder votes on corporate pay binding.


The proposals have been watered-down, so the pledges haven’t been met. The current proposals don’t provide for binding votes but do force more transparency on companies who have shareholder opposition.

Claim 1 of 2

“When she became leader the Prime Minister pledged, and I quote: “I want to make shareholder votes on corporate pay not just advisory but binding” and she put it into her manifesto. That manifesto has now been dumped… She’s gone back on her word.”

Jeremy Corbyn, 6 September 2017

“It’s Conservatives that gave shareholders the power to veto pay policies.”

Theresa May, 6 September 2017

Although it’s not obvious, the two leaders are actually talking about different things. Both have a point—the Conservatives’ latest proposals on executive pay have watered-down those they’ve made in the past but they did strengthen shareholders’ powers in 2013 as part of the Coalition government (and the responsible minister was actually Liberal Democrat).

How are they talking about different things? Because there’s a difference between a “pay policy” and the actual pay that’s set out for directors of a company each year. Theresa May is talking about the rules on setting the policy on directors’ pay for future years, while Jeremy Corbyn is focusing on the amount a director gets in a given year.

Between the Companies Act 2006 and up until 2013, listed companies were required to publish an annual Directors Remuneration Report setting out, among other things, the company’s policy on pay for its directors. Shareholders were able to vote on these reports—but not the actual pay awards to individuals—at Annual General Meetings, but those votes weren’t binding on the companies.

It’s worth saying that even if a vote is legally non-binding, it can still influence the company. Research has shown that in some—but not all—cases since 2003, companies did react when their remuneration report was voted down by shareholders.

In 2013, the Coalition government introduced reforms to make the votes on the setting of future pay policies binding, but kept the actual setting of directors’ pay as an advisory vote.

In the last year Theresa May and the Conservatives have pledged to strengthen this further still, and make setting the pay packages a binding vote by shareholders.

When she launched her campaign to be Conservative leader in 2016 Theresa May said: “I want to make shareholder votes on corporate pay not just advisory but binding.”

The Conservatives’ 2017 manifesto followed that up by pledging: “The next Conservative government will legislate to make executive pay packages subject to strict annual votes by shareholders”.

The latest reforms—announced just last week—amount to a watering-down of this particular pledge. Instead of introducing more binding votes on pay packages, the new requirements will focus instead on greater transparency. Companies with significant shareholder opposition to executive pay packets will be forced to have their names published on a register.

A government official said: “Our response will introduce reforms to make our largest companies more transparent and more accountable to their staff and shareholders and restore the balance between a company’s performance and executive pay”.

This factcheck is part of a roundup of Prime Minister's Questions. Read the roundup.


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