Shareholders are to win a legal right to block sky-high pay awards to company executives under radical plans for an assault on "fat cat" earnings drawn up by the government. Senior ministers, including the business secretary, Vince Cable, are backing a move that would give shareholders an effective veto over pay deals they deem unacceptable.
David Cameron confirmed the move and said he was determined to end the "merry-go-round" of super-rich bosses rubber-stamping each others' inflated deals and being rewarded for failure: "Let's empower the shareholders by having a straight, shareholder vote on top pay packages," he said. "The market for top people isn't working; it needs to be sorted out."
The move by ministers, which would require legislation, came to light as the main parties scrambled to occupy the high ground over executive pay, ahead of the politically charged bank bonus season. It reflects a growing consensus at Westminster that executive pay is out of control and has to be tackled, particularly at a time when many people are losing their jobs and those on modest earning are having their pay frozen.
In the past financial year, the directors of FTSE 100 companies have seen a 49% increase in total earnings, taking average pay to £2.7m. Although bonuses will probably be down on last year, the hefty sums awarded will further highlight the growing chasm between rich and poor and fuel complaints that the government is too soft on the City.
Labour, whose leader, Ed Miliband, has called for a "fairer and better capitalism", challenged the government to back all the recommendations of the independent High Pay Commission in order to increase transparency and accountability in the boardroom and the City. Currently shareholders have a right to vote on pay awards, but the vote is "advisory" and often takes place only after decisions have been made on executive pay. Under the plans being drawn up by cabinet ministers, the vote would, for the first time, have legal force, so that executives would be subject to the democratic will of shareholders over pay.
Cameron criticised boardroom cronies who helped each other "fill their boots" while the country was being forced to tighten its belt. "We've got to deal with the merry-go-round where there's too many cases of remuneration committee members sitting on each other's boards, patting each other's backs and handing out each other's pay rises," he said.
"We need to redefine the word 'fair'. We need to try to give people a sense that we have a vision at the end of this, of a fairer, better economy, a fairer, better society, where if you work hard and do the right thing you get rewarded."
Anger among shareholders and the public at soaring executive pay has been growing in recent years. Shareholder rebellions have become increasingly common. Advertising giant WPP's management received a stinging rebuke from investors last year, with 42% of shareholders voting against the remuneration report. Shareholder activists objected to the fact that Mark Read, the head of WPP Digital, received a pay rise of 31% to £425,000 in January.
Other reforms being considered by ministers include ending the "cosy cartel" that allows top executives to set each other's pay, by bringing outsiders on to remuneration committees, and introducing rules to force executives to take more of their pay in shares that cannot be cashed in for at least five years.
The High Pay Commission said executive remuneration was out of control. It cited the pay of the head of Barclays, which rose by nearly 5,000% in 30 years, a period in which average wages had risen only threefold. It made 12 recommendations, including:
• Greater transparency in the calculation of executive pay, to end the "closed shop" on pay decisions.
• Putting employees and other "outsiders" on remuneration committees.
• Publishing the top 10 executive pay packages outside the boardroom in order to illustrate the sums earned by senior traders at investment banks.
• Forcing companies to publish a pay ratio between the highest paid executive and the company median.
• Requiring companies to publish a single total pay figure for boardroom members, including pension benefits.
Will Hutton, Observer columnist and author of an independent review of fair pay delivered to the government last March, called for companies and the public sector to publish annually the five-year trend of the ratio of top pay to median pay and justify upward movement. "Citizens, workers and shareholders would have the ammunition to challenge undeserved top pay," he said.
Deborah Hargreaves, who chairs the commission and is a former business editor of the Guardian, said: "We urge the government to be bold in their reforms and not be put off by the strong possibility of a backlash from the business lobby. The public are right behind the campaign in this new era of austerity."
Chuka Umunna, the shadow business secretary, said: "We have set three tests for the government to meet, based on the principles of transparency, accountability and fairness. Anything less than the full implementation of these measures by the prime minister will fall short of what is required to empower those who ultimately own our businesses."
