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Institutional investors welcome plans to curb 'excessive' executive pay

UK - Institutional investors welcomed the government’s proposals for measures to curb excessive pay on the boards of UK companies.

Moves to increase transparency over the issue were seen as positive, as were plans to bring in binding votes by shareholders on top pay.

Joanne Segars, chief executive at the National Association of Pension Funds (NAPF), said: “As major institutional investors, the NAPF welcomes [the] announcement from Vince Cable, which is in line with much of what we have been arguing for.

“Greater transparency and simpler pay structures are a must. Boiling all the pay awards and bonus options down to a single figure will help shareholders hold executive pay up to the light.”

Vince Cable, the secretary of state for Business, Innovation and Skills, told parliament on Monday that something had to be done about the “disconnect between top pay and company performance”.

He outlined new legislation that would improve transparency over executive pay, increase shareholder powers by bringing in binding votes on future pay policy and other matters, make boards and remunerations committees more diverse, and have best practice led by the business and investment community.

Commenting on Cable’s statement, Dominic Rossi, global equities CIO at Fidelity Worldwide Investment, said: “We support the call for greater transparency and the further disclosure required on the workings of remuneration committees.

“The introduction of a binding vote on pay is a particularly welcome move.  As always, the devil will be in the detail, but we look forward to putting forward our proposals during the forthcoming consultation.”

However, Segars sounded a note of caution on this element of the proposals.

“The introduction of a binding vote needs to be handled very carefully, and shareholders need to know more about what it means,” she said.

“A vote must not impede the effective management of businesses, or the constructive dialogue between shareholders and boards.”

The Investment Management Association also welcomed the planned legislation.

Liz Murrall, director of corporate governance and reporting, said: “We recognise that reforms are needed, particularly to improve transparency and address the lack of a clear link between pay and performance.”

Legal & General Investment Management said the issue of executive pay was often a bone of contention.

Sacha Sadan, director of corporate governance at the asset manager, said: “This has been an area of concern on which we regularly engage with companies, and where we have not been happy with the companies’ proposals we have voted against the remuneration report.”

The plan to require the remuneration report to be split into two sections - policy and implementation of policy - was welcomed by stewardship services provider Governance for Owners.

But care should be taken over the use of benchmarks, it warned.

Simon Wong, partner at the firm, which also manages the European Focus Fund, said: “While it could provide a more objective way to evaluate the appropriateness of pay, they can also be abused - for example, selecting much larger companies as ‘peers’ - to justify higher than warranted pay levels.”

Making companies explain how pay structures reflected and supported company strategy was also highly welcome, he said.

On the binding vote matter, Wong said he was pleased the government was circumscribing its scope.

“The binding vote on directors’ notice period longer than one year and exit payments of more than one year’s salary could be useful for companies when negotiating with senior management candidates,” he said.

But he also said he worried the binding vote on future pay policy could constrain boards too much, or lead to companies using broadly worded pay policies and analysis.

FairPensions, an organisation campaigning for ethical investment at UK pension funds, said more action was needed on high boardroom pay.

Catherine Howarth, chief executive, said: “Government proposals for a binding vote on executive pay are welcome, but to pretend that this alone will solve the high pay problem is either naïve or disingenuous.

“More searching questions need to be asked about how shareholders will use these new powers.”

The government should make shareholders more accountable and responsible, she said.

“This means requiring much greater transparency to savers on how votes are cast,” she added.

“It also requires legal changes to clarify that investors’ duties do not begin and end with maximising short-term profit.”

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