As of today (tuesday), shareholders will have the power to approve directors’ pay together with a binding vote on pay policy and exit payments, under the new Enterprise and Regulatory Reform Act 2013.

What does the new law mean?

The new rules mean that once a pay policy has been agreed, it will then stand for a year and any bonus or increase in salary for directors during this time must be in line with this.

This change will affect quoted companies once their new financial year occurs. So those who begin their new financial year in October will be the first tranche to test the changes.

The input of shareholders in this way is an attempt by the government to demystify the financial workings of companies for the benefit of shareholders and address the perceived failure of companies to correlate sometimes excessive pay with the performance of the company.

Considering whether the new law could breach existing employment contracts, Tony Fisher, a Senior Partner and Head of Commercial at QualitySolicitors Fisher Jones Greenwood, says: “It is conceivable that the policy voted for by the shareholders may be so restrictive that it could either deny a director the contractual right for a year on year pay increase, or a contractual bonus, which could result in legal action. If there are such contractual issues to navigate they should be highlighted to shareholders when the information relating to remuneration policy is circulated, in order that the company does not fall foul of their contractual obligations.

Moving forward, however, a solution to avoid any contractual issue would be to draft director’s contracts more broadly, or draft them to incorporate any impact a remuneration policy may have. Arguably, this is a step forward in encouraging shareholders to participate more and have an actual input in companies they invest in. However, a clear picture of how much shareholders have wanted to exercise their views under this new rule and what impact that has had won’t be seen until October 2014.”