DIRECTORS have been put on notice over executive pay, with boards now facing a potential spill if they ignore shareholder opposition to remuneration packages.
Under the landmark ''two-strikes'' rule, passed by the Senate last night, shareholders will be able to demand a vote on whether to spill the board if more than a quarter of votes oppose the remuneration report at two successive annual general meetings.
The change, opposed by directors but backed by shareholder groups, is set to transform remuneration votes from being largely symbolic affairs that boards could ignore at their will.
From July 1, shareholders can use remuneration to force a vote on a spill motion, which would require majority support to force fresh board elections.
The parliamentary secretary to the Treasurer, David Bradbury, said the rules would boost transparency and give shareholders a greater say in how much executives were paid.
"Shareholders, as the owners of a company, take on the risk of investing their capital and share in a company's profits and losses, and the Gillard government believes they deserve more say over how the pay of company executives is set," Mr Bradbury said.
The bill was allowed to pass by the Coalition, but the government was accused of not going far enough by the Greens, who will take the balance of power in the Senate next month.
The Greens put forward amendments to cap executive pay at 30 times the average wage within that company, but the proposal found little support.
The Greens have said executive pay has surged by 130 per cent between 2001 and last year, compared with a 52 per cent increase in regular wages.
The Opposition had also moved amendments to make it more difficult for shareholders to trigger a board spill, by raising the threshold to 25 per cent of all shares on issue, rather than 25 per cent of votes cast.
The chief executive of the Australian Shareholders' Association, Vas Kolesnikoff, supported the change, saying it would pressure boards to listen more to shareholders.
If the new rules had been in place, Mr Kolesnikoff noted that the mining company Rio Tinto could have faced board spill votes after significant opposition to its remuneration
reports at annual general meetings this year and last year.
However, Mr Kolesnikoff said spills over executive pay were more likely in smaller companies, whose stock tended to be tightly held.
''Shareholders will be looking at boards and remuneration reports more closely, and boards will have to be more responsive as shareholders seek to engage with this legislation,'' he said.
The ''two-strikes'' rule was a key recommendation of a Productivity Commission into executive pay, begun in 2009 after the global financial crisis.
Separately from this review, the government has floated its own changes to ''claw back'' executive pay where a company has mis-stated its accounts.
The Senate is also due to vote on the government's ban on home loan exit fees as soon as today, with the fate of the legislation resting in the hands of the Family First senator Steve Fielding.
Senator Fielding holds the deciding vote on a push from Senator Nick Xenophon to overturn the ban due to fears it will disadvantage smaller lenders.