Vince Cable's pay reforms should have gone further

The first binding votes on pay will take place at annual meetings in 2014 - many doubters of the government's resolve thought the day would never come
Vince Cable. Photograph: Stefan Rousseau/PA

Vince Cable, business secretary, today claimed he is introducing "the most comprehensive reforms of the framework for directors' remuneration in a decade". The boast is probably fair – but only because past efforts in this field, such as Labour's introduction in 2002 of an advisory vote on pay, were utterly feeble. Let's be clear about what Cable has done: he has needlessly watered down his original idea to introduce a binding annual vote on pay, opting instead to make such votes happen only every three years in most cases.

Cable's cover story is that companies should set pay with long-term principles in mind. Thus, as long as pay committees abide by policies that are approved by shareholders every three years, the bog-standard advisory vote should suffice in the other years.

This logic is not persuasive. The chief problem is the vagueness of the term "pay policy". Take Barclays, where chairman Marcus Agius has often boasted that "we pay as little as we can get away with". Who wouldn't applaud that fine principle? But then you see how Agius and his colleagues interpret it – for example, the £2.7m bonus for Barclays chief executive Bob Diamond in a year in which returns on equity were "unacceptable" (Diamond's word).

True, in practice, companies would have to set some parameters within their pay policies – a crude pledge that the non-executive would try their hardest wouldn't do. But the point remains: awarding bonuses and share options involves matters of judgment and discretion. The shareholders' vote, at least in part, is meant to be a verdict on how the directors have exercised that judgment. And, as the bonuses and share awards are dished out annually, a binding vote should happen every year if it is to happen at all.

Still, let's not be too churlish. Assuming Cable's reforms do not get diluted any further as they go through parliament, at least the first binding votes will take place at annual meetings in 2014. Many doubters of the government's resolve thought the day would never come. There are other good elements, such as the principle that companies won't be able to pay exiting directors more than shareholders have agreed. There is also a beefing-up of the advisory vote on pay – a "no" vote will automatically trigger a binding vote the following year. Call the package a step forward – just not the three steps forward that it could have been.

But remember, too, the context here. There are still too few engaged shareholders. Even many of the activists don't dare to vote against the re-election of a director, even the chairman of a pay committee whose report has been rejected. And many companies that have experienced revolts over pay continue to believe they have a communications problem and not a pay problem. These are all deep cultural problems that have contributed to the widening of the gulf between boardroom pay and boardroom performance. A binding vote, whether held annually or every three years, is far from being a cure-all.