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Tougher investor stance on executive pay signalled for 2017

The UK’s Pension’s and Lifetime Savings Association (PLSA) has advised its pension fund members to act more strongly on executive pay. It is advising funds oppose the re-election of the remuneration committee chair as a company director if they decide as shareholders to vote against a company’s remuneration policy.

The PLSA’s voting guidelines for 2017 have been released following its annual report in December which included a survey which showed that 85% of pension funds were concerned by the pay gap between executives and ordinary workers. The research also showed that while there were significant votes against pay practices at a number of FTSE 350 companies, there was little opposition to the re-election of the remuneration committee chairs.

Luke Hildyard, Policy Lead: Stewardship and Corporate Governance, PLSA, said:“Provocative levels of executive pay are doing great damage to the reputation of British business. The failure of some companies to recognise stakeholder concerns on this issue is a major worry for pension funds as investors.

“Our new guidelines are designed to ensure the individuals responsible for a company’s executive pay practices are held to account. We hope that this can at last deliver meaningful progress on excessive top pay.”

The guidelines also call for companies to explain what steps they are taking to bring diversity, in all its guises, to their boardroom and suggest that annual reports should include better information about a company’s corporate culture and employment practices.

The PLSA’s recommendations for pension fund investors to take a tougher stance on pay follow the indications by Blackrock, the world’s largest asset manager, that it would be doing just that this year. The fund manager has written to the chairmen of  FTSE 350 companies calling on boards to ensure executive pay packages are more in line with the rest of the workforce.

Amra Balic, head of BlackRock’s EMEA Investment Stewardship team, signalled the new approach when she spoke to MPs on the Business, Energy and Industrial Strategy select committee in December. She said then that if if there was a disconnect between a company’s executive pay and the performance of a company going forward BlackRock would be voting against the re-election of remuneration committee chairman.

Meanwhile at a session at the World Economic Forum annual meeting in Davos this week  entitled ‘Ending Executive Pay‘ Aron Cramer, chief executive of Business for Social Responsibility said the sums involved in the pay of the top bosses globally no longer passed the ‘reasonable man test’.

Cramer said: “The reasonable man looks at these numbers and says this doesn’t make sense, no person is worth that much. Executive pay might make sense where it is now in its own universe but doesn’t in the context of what the rest of us who are not CEOs of publicly traded companies are experiencing.”

He viewed the continued acceptance by the majority of top executives of rising pay as a failure of leadership. Cramer believes that changing the incentive structure for executives so it reflected environmental, social and governance themes such as carbon reduction or stakeholder engagement would lead to a more broad definition of value in a company. If employees and stakeholders  can see that top executive pay is more aligned to the long term value of a company and if employees feel that they are getting a fair share of that value then executive pay should become less of an issue Cramer suggested.

Rajeev Vasudeva, chief executive of the search firm Egon Zehnder, suggested that it had to be recognised that individual leaders could no longer make the difference they could in the past and that creating value in a company required more of a team effort and remuneration packages should reflect that.

He indicated that boards had not been doing as good a job as was required at being the guardians of the values of their companies. He said this was partly reflected in the composition of boards and that they were not being sufficiently independent to challenge management over issues such as pay. Like Cramer Vasudeva was indicating that business leaders needed to recognise their role in society and that remuneration was part of this recognition of their social responsibility.

What do you think?