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Labour Proposals for Executive Remuneration

03 December 2018

Labour Proposals for Executive Remuneration

In November 2018, while the attention of the business world was focused on the latest stages of the UK government’s attempt to exit the EU, and the worldwide threat of rising protectionism and Trump inspired Trade Wars, a policy proposal from Labour for Executive Remuneration received little attention. This is a different and separate policy proposal from the 10% in 10 years of company shares to be owned by Inclusive Ownership Trusts which the Shadow Chancellor revealed at the 2018 Labour Party Conference. 

The proposals for Executive Remuneration are set out in a report commissioned by the Shadow Chancellor John McDonnell and the Shadow Business Secretary Rebecca Long-Bailey and were prepared by a group of academic accountants and lawyers. They are not official Labour Party policy, but the proposals were warmly welcomed by Mr McDonnell and Mrs Long-Bailey. The report is available for download here.

They propose very radical changes to the setting of Executive Remuneration to curb what the report describes as “undeserved remuneration” and deal with a “Policy failure to check executive pay and secure an equitable distribution of income”. 

The proposals include many specific changes which, through legislation and changes in codes, would radically alter the way Executive Remuneration was set for the UK’s 7000 largest companies and groups - essentially businesses that employ more than 250 people. The scope of these changes would extend to partnerships and charities. 

Company Law would be changed to require employee and customer stakeholders to be involved in the process of setting Executive Remuneration, not just the directors and shareholders. Through legislation, these stakeholders could have the power to set an upper limit cap on Total Executive Remuneration.

Company Law would be changed to provide for legislation to clawback Executive Remuneration. “Golden handshakes, hellos, handcuffs, parachutes, goodbyes and severance” would be prohibited.

The use of company shares to remunerate executives is seen as contributing to “undeserved remuneration” and a lack of transparency and understand-ability in Executive Remuneration which prevents control of Executive Remuneration. Therefore, in order for the Total Executive Remuneration cap to operate, it is proposed that all Executive Remuneration should normally only be paid in cash, and that company equity should only exceptionally be available for Executive Remuneration if the share schemes are also offered on the same terms to all employees.

If an individual’s annual Total Remuneration exceeds £1 million per annum then remuneration in excess of this would not be eligible for corporation tax relief. 

Remuneration to any employee in excess of £150,000 per annum would need to be disclosed in the annual accounts in bands of £10,000 with each individual named. Persistent failure to comply with Minimum or Living Wage legislation would lead to criminal charges on the directors and personal minimum fines equal to the Executive’s Remuneration.

These proposals would be enforced by a combination of legislative changes and new Codes of Conduct which would be monitored by a new Companies Commission. This would replace voluntary organisations such as the Financial Reporting Council (FRC) which are considered to have “failed”. A separate report on the future Companies Commission and how it would oversee and enforce UK Company Law and corporate governance is also being prepared.

Given the present state of the government and British politics, as government and political parties seek to respond to the 2016 Referendum result, it may be unwise to assume that proposals along at least some of these lines will never be implemented. 

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