Investment managers are calling for pay packets of senior leaders of FTSE companies to be kept in check during the ongoing cost-of-living crisis.

This year’s annual pay guidelines for FTSE companies, set out yesterday by the Investment Association’s (IA) Principles of Remuneration and letter to remuneration committee chairs, ask that additional restraint is shown for executive salary increases, as many UK households struggle with the increased cost-of-living.

The principles set out what investors will be looking for from investee companies regarding executive pay in the 2023 AGM season. 

Andrew Ninian, director for stewardship and corporate governance at the IA, said:“With the cost-of-living crisis hitting UK households, investors want to see companies show restraint on executive pay and bonuses, ensuring that executive pay packets are balanced against the experiences of their wider workforce, customers, and other stakeholders.”

Company boards will need to carefully navigate this period of significantly higher inflation and economic uncertainty when judging 2022 pay outcomes and setting executive pay for 2023 to ensure the long-term success of their companies, the Association said.

Investors want to see boards balance the need to incentivise executive performance and reward those who outperformed during the difficult market conditions, while ensuring that executive experience is commensurate with that of key stakeholders including shareholders, and those most impacted by the cost-of-living crisis, such as lower paid employees, vulnerable customers, and suppliers, it added.

The retention and motivation of employees below the executive level will be key for many companies and board decisions could impact on the productivity of the whole workforce.

Ninian noted that while many companies are already targeting salary increases to lower paid employees, “it is imperative that all companies carefully consider how they award pay to promote the long-term success of the business”.  

Company boards will also be considering long-term incentive grants made to senior executives in 2020, which will be vesting in 2023. These 2020 grants were made during the pandemic following significant share price falls, so a greater number of shares were granted compared to previous years.

Given this, the Association said, investors are asking remuneration committees to clearly articulate to shareholders how they have considered the impact of any potential windfall gains when determining vesting outcomes. If a committee decides not to adjust for windfall gains, it should explain and disclose its rationale for doing so, it added.

Investment managers want to see pension contributions for executive directors aligned with those available to the majority of the company’s workforce by the end of 2022, IA said.

The majority of companies are fully aligned but for 2023, the IA’s Institutional Voting Information Service (IVIS) will now give a ‘red top’ – indicating its highest level of concern – to any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce.

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