Business Secretary Vince Cable has announced new legislation, which will give shareholders the power to fix director remuneration levels in a bid to tie performance to payments.

These “binding votes” on executive remuneration and exit payments mean that companies will require the support of the majority of shareholders to implement pay plans for directors and these will be subject to binding annual votes or votes every three years if the policy remains unchanged.

At the moment shareholders’ votes are purely advisory. This new legislation would be “the most comprehensive set of reforms” of the framework for directors’ remuneration in a decade.

Dr Cable said: “At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.”

However, John Longworth, Director General of the British Chambers of Commerce (BCC), warned that executive pay is a matter for business, not politicians, saying:

“Over the years, corporate governance in this area has sometimes failed, prompting the need for action to ensure shareholders’ interests are safeguarded. If binding votes every three years deliver improved levels of shareholder accountability, we have no objections.

“But Government intervention should stop there. Setting levels of executive pay is a matter for companies, their boards, and their shareholders, not politicians.”

While Mark Boleat, Policy Chairman at the City of London Corporation, which promotes the capital’s financial sector said: “High pay for success is perfectly acceptable, it is high pay for failure that needs to be addressed.”

And other critics warn that the very transparency the Government wants could actually increase the base pay for directors, as companies vie to pay above the average to retain talent.