EUROPE – Some of the UK's largest pension fund investors are calling for a major rethink on executive pay to align it more closely with the long-term performance of a business.

The BT Pension Scheme, RPMI Railpen, USS Investment Management, Hermes Equity Ownership Services (Hermes EOS) and the National Association of Pension Funds (NAPF) have jointly published a discussion document setting out guidance on remuneration.

The report sets out four principles to encourage companies to change their reward structures as they begin to think ahead to the introduction of the binding vote on remuneration policy next year.

The Remuneration Principles are:

1.    Management should make a material long-term investment in shares of the businesses they manage. For example, shares granted to executive directors should ideally be owned for at least 10 years, whether or not the executive is still in post. This would encourage succession planning and reduce the need for 'golden hellos' for new directors.

2.    Pay should be aligned to long-term success and the desired corporate culture throughout the organisation. Pay awards and pensions arrangements should be consistent throughout the organisation and, if not, there should be a justifiable explanation.

3.    Pay schemes should be simple, understandable for investors and executives and ensure that rewards reflect long-term returns to shareholders. For example, large awards should not be paid where returns to shareholders are below the cost of capital.

4.    Remuneration committees should justify how their decisions will help deliver long-term business success. They should consider scaling back or eliminating awards where targets have been met by, for example, aggressive accounting or high leverage, or if the company has suffered reputational damage.

NAPF chief executive Joanne Segars said: "Shareholders want a much simpler approach that nails boardroom pay to the long-term health of a business. Paying executives proportionally more in shares that are owned for a long time could help align pay with shareholder interests."

Jennifer Walmsley, head of UK engagement at Hermes EOS, said: "Flawed remuneration schemes can create inappropriate incentives, with even the best-designed schemes potentially resulting in outcomes that do not match up to a deeper analysis of company performance.

"By publishing these principles, we hope to encourage companies to reconsider their current remuneration arrangements to better align the interests of executives and shareholders, and ultimately enable companies to position themselves for future success."

Following the publication of the Remuneration Principles, Hermes EOS and the NAPF will host a number of working seminars bringing together remuneration committee chairs and shareowner representatives.

The objective is to discuss the four principles, and to refine this document so that it offers an authoritative guide on companies' pay practices and helps shareholders to assess them.