Companies must guard against using industry benchmarks to justify executive pay increases, a sweeping report on remuneration at UK-listed firms has argued.
The independent executive remuneration working group, chaired by the chief executive of Legal & General Nigel Wilson, argued its recommendations would help simplify pay structures.
Wilson said it was time to “restore public confidence” in pay, with one of the report’s recommendations to ensure that members of remuneration committees sit on the committee for at least a year before being asked to chair them.
“Our report shows shareholders, boards and executives agree that the current approach is not working and want constructive collaboration to get it right,” Wilson said.
Other recommendations were for company boards as a whole to be “appropriately engaged” with any remuneration policy drawn up by committees, while allowing committees greater leeway to tailor pay packages, and for committees to guard against industry-wide benchmarking, which would drive up pay unnecessarily.
“A small number of consultees highlighted recent cases of remuneration consultants providing information to executive directors, to show that the directors were paid ‘behind the median’,” the report noted.
It added that such practices, which it deemed a violation of existing codes of conduct on pay, should be addressed by remuneration committees.
The Financial Reporting Council, the UK regulator responsible for the Stewardship Code, welcomed the proposals and emphasised the importance of linking a firm’s culture and values to any proposed pay package.
It warned, however, that while the UK largely had a strong reputation for good corporate governance, it was vital to guard against confidence “being tarnished by the actions of those companies doing too little” on remuneration.
The Investment Association, the industry group for UK asset managers, said recent comments by Theresa May, the new UK prime minister, showed investors and companies needed to work together to tackle pay.
Its director of corporate governance and engagement, Andrew Ninian, added: “We will now look to amend our Principles of Remuneration so the asset managers that look after the financial interests of millions of savers and investors can play their part in delivering the change that is sorely needed.”