Freshfields' Simon Evans and Alice Greenwell examine whether the Government's pay proposals will drive change

Even those who are not keen students of executive pay will know there are regular calls for change to the current system – particularly following economic downturns. In the past little has changed, but this time it looks different – the Government is publicly committed to achieving change. Although we will not know the exact shape of the proposed measures until the spring, we can speculate about which of the proposals currently being debated might be adopted, and what they might mean for listed companies and banks.

Giving shareholders more power – Prime Minister David Cameron has publicly backed the proposal that shareholders be given a binding vote on directors' pay. The current regime for listed companies gives shareholders only an advisory vote on the directors' remuneration report – so the vote is primarily a means for shareholders to express their disapproval over the pay packages of directors.

In terms of how a binding vote might work, it would not be practicable to boil down the directors' pay package into a simple resolution. In practice, there is a spectrum of possible approaches ranging from the readily workable (including exerting greater shareholder control over annual long-term incentive plan awards and termination costs for leavers) to others that would be unworkable (though they may look superficially attractive).

But would a binding vote actually change anything? Shareholders, as owners, have primary oversight over the remuneration committee's work, but their willingness to carry out this role is being widely questioned. The existing advisory vote regime has been in operation for UK-listed companies since 2003, and very few remuneration reports have been voted down. It seems companies are engaging with their shareholders on pay and shareholders are generally happy with what companies are doing. It is difficult to see shareholders acting differently if they were given more power.

So it seems the Government will have a hard time persuading shareholders that they should be the channel to bring about reforms that the Government regards as a higher priority than they do. Although, of course, the Government will get much more traction on a binding vote when it is itself a significant shareholder – as in the case of the rescued banks.

Stamping out 'cronyism' – one of the other ideas getting air time is that there is a network of directors who decide each others' pay and that the resulting merry-go-round of self-interest has caused the current levels of pay. The proposals to address this involve shaking up the membership of remuneration committees by introducing employee representatives to the committee, requiring independent (non-board) members of the committee and by preventing executive directors sitting on the remuneration committees of other companies.

The charge of cronyism and back-scratching does not really hold up. In any event, where there are cross-directorships, the UK's Corporate Governance Code badges the affected directors as non-independent and thereby effectively prevents the directors concerned from sitting on the committee.

alice-greenwell-freshfieldsProposals for non-directors to sit on remuneration committees, be they employees or independent members, are pretty unattractive. As well as concerns about sharing confidential information with non-directors, pity the poor employee who finds himself as a lone voice on a remuneration committee and feeling duty bound to criticise his bosses' pay.

But employees could have more of a role on directors' pay as stakeholders in the company. One possibility is an employee forum with which the company consults and which prepares a publicly available report on pay. This would be feasible for larger companies and would allow a more nuanced debate than having an employee on the committee or an employee-wide vote on pay.

Simplified disclosure of pay – Simplified disclosure is desirable. The current approach taken by companies is heavily influenced by the regulations on directors' remuneration reports which deal separately with each of the disparate elements of the pay package.

But that doesn't mean that simplification is not achievable. A single number for pay in a year is unlikely to be meaningful, but companies could provide simplified summaries of directors' pay packages broken down by item for the year – even though the summaries would need to cross-refer to detailed information elsewhere in a remuneration report.

Despite a lot of support in some quarters, Cameron seemed lukewarm on proposals that 
would require disclosure of the ratio between director pay and median employee pay. Even though the value of this disclosure can be questioned (Goldman Sachs' ratio is likely to look much 'healthier' than Tesco's) there may be some comparisons that could be drawn between companies in the same sector.

Improving the structure of pay – it should follow that if the structure of pay is simplified then the consequential disclosure of that pay will also be simplified. However, pay structure is one area of the debate where no workable solutions have really been suggested. That, in part, is indicative of the fact there are no easy answers, but also reflects the fact that a company's remuneration arrangements should reflect the corporate strategy and that there can be no one-size-fits-all approach.

And what of the bankers? – Interestingly, bankers' pay – the focus of public anger at the height of the financial crisis – looks as if it will come off quite lightly with the current round of measures being proposed. There is a specific consultation on disclosure requirements for the pay of the highest eight earners, but that will affect only a very small number of employees in only the largest banks. Otherwise, financial institutions will have to work within the Financial Services Authority's existing remuneration code and wait for the detail of CRD4 to be finalised to know the fate of their pay arrangements.

Simon Evans (main image) is a partner and Alice Greenwell (pictured above) a senior associate in Freshfields Bruckhaus Deringer's employment, pensions and benefits practice.