Asset owners may now be able to challenge pay inequality more aggressively, using reports backed by staunchly pro-capitalist institutions, write Jonathan Williams

Executive pay has been a hotly debated issue at AGMs for several years and was one of the issues the 2012 Shareholder Spring brought to the fore. As large institutional shareholders, pension funds have a role to play in tackling high pay, with Dutch manager PGGM in June announcing plans to tackle excessive remuneration packages. The initiative was launched after the pension manager decided engagement and voting was failing to change levels of pay.

Catherine Jackson, senior adviser for responsible investment at PGGM, says it would be important to tackle repeat offenders but also stresses the need to address growing pay gaps between best and worst-paid workers. “As a shareholder, we want to contribute to solving the problem of income inequality and reverse practices that have increased during the past decade. The providers of capital must take back control of remuneration practice.”

But before pay can be tackled at listed companies, it will also be important for asset owners to end practices they would oppose in their holdings. Pension manager APG recently encountered such problems after a Dutch court found in favour of former board member Adri van der Wurff, who insisted he be paid his ‘golden handshake’ in full. The dispute arose after van der Wurff’s previous agreement fell foul of the 2015 Dutch law on remuneration policy at financial companies (Wbfo), which limited severance payments to one year. The court ruling meant the former board member was awarded €1.1m, as agreed in early 2014, rather than the €506,000 that would have been in line with Wbfo.

However, in an attempt to tackle high salaries and performance-related pay, APG, PGGM and fellow pension manager MN have changed their policies, either limiting or ending performance-related payments. Nevertheless, with the end of performance-related pay, PGGM only increased salaries by half of the previous level.

The question of how all these steps could help reduce income inequality is easily answered, at least according to many union-led movements. In the UK, the union umbrella group TUC has repeatedly highlighted the discrepancy in pay between executives and a company’s lowest-paid staff, finding that, within the FTSE 250, the ratio between executive pay and average salary can range from 1,601:1 to 3:1. Additionally, the union has urged that pay ratios at companies be taken into consideration when shareholders vote – a policy taken on by France’s supplementary pension fund for civil servants, ERAFP. Since 2014, the fund has based voting decisions on a “maximum socially acceptable level” of pay, which it capped at no more than 50 times the company’s median pay.

Excessive inequality is often blamed for  damaging economic growth – and therefore returns – giving socially minded investors additional justification to tackle the matter. In a June paper on the causes and consequences of inequality, the IMF said there was evidence that, as the share of income granted to the top 20% of society increased, growth declined over the medium term, throwing the effectiveness of trickle-down economics into doubt. “The poor and the middle class matter the most for growth via a number of interrelated economic, social and political channels,” the paper said.

The IMF’s findings are backed up by the OECD, which came to the same conclusion last year. Backed by such evidence, asset owners will be able to challenge pay inequality more aggressively, using reports backed by staunchly pro-capitalist institutions as evidence that their concerns do not merely stem from a dislike of excessive pay – an accusation some would throw at the union movement. 

Jonathan Williams is senior report at IPE