More pay does not equal better performance, top UK investor warns top executives

FTSE 350 companies risk a backlash from one of the country’s biggest pension fund investors if executive pay is not curbed. The Local Authority Pension Fund Forum, which represents pension funds with more than £115bn in assets, has published guidelines on its expectations for executive pay, arriving at the following conclusion

More pay does not necessarily equal better performance. The significant growth in performance-based pay at UK companies has not driven significant improvements in financial returns to shareholders, nor has it improved overall long-term shareholder value.

The Forum highlighted concerns over steady increases in executive pay in recent years despite flat or negative company performance, and the growing gap between those at the top and everyone else, which can undermine morale in the workforce.

The Forum’s guidelines are intended to provide practical ways to encourage executive remuneration consistent with long-term, sustainable returns and shareholder value.

The guidelines encourage remuneration committees at FTSE 350 companies to comply with the following recommendations:

Pay and bonuses:

• Base salary should be the primary vehicle for remunerating executive directors
• Long-term incentive plans (LTIPs) should be phased out in favour of company-wide long-term profit pools that use a formula for calculating bonuses based on salary and seniority
• The total pay for a new executive should be set below that of the departing executive
• Bonuses should be clawed back where ethical standards are breached or where poor environmental or social performance causes harm to the company

Pay differentials:

• Directors should participate in company pension arrangements on the same terms as employees
• The use of market benchmarks should be discouraged.
• The ratio between the average employee pay and average executive director pay and the ratio between the top and bottom 10% should be published.

Executive recruitment:

• All new executive positions should be publicly advertised.
• Recruitment processes should be transparent and serious consideration should be given to internal candidates for executive roles.
• `Golden hellos` should be discontinued.

Consultation with shareholders and staff:

• Proactively consult with institutional shareholders on pay policies and practices.
• Views of managers and employees should be considered when setting executive pay.

Sarah Martin
Carillion Advice Services