UK public sector pension funds call on investors to clamp down on size of exec pay deals

Report outlines 15 proposals for investors to pick up.

The £115bn UK Local Authority Pension Fund Forum (LAPFF), a group of 57 public sector pension funds, has become one of the first institutional investor groups to criticise the size or ‘quantum’ of pay packages handed to corporate executives rather than just their remuneration structure, putting it on a similar footing to the EU, which recently pledged to cap bankers’ bonuses to one year of salary. In a report titled “Expectations for Executive Pay” sent to executives of all FTSE350 companies, LAPFF said increasing executive rewards in recent years despite flat or negative performance in many cases meant investors should devote more attention to the scale and increase in top pay.
LAPFF, one of the most active shareholder groups in the UK, was a major voting bloc in 2012’s Shareholder Spring backlash against high levels of executive pay. The latest report lays out 15 proposals that it says investors should demand to further dampen burgeoning director remuneration. Its publication suggests that 2013 could also prove to be a highly charged AGM season on the pay issue. Key proposals in the report include a clampdown on packages for incoming directors and a ban on so-called ‘Golden Hellos’. LAPFF said the total pay of any new incoming executive should be below that of the incumbent to allow for a period of learning and adjustment. It said this could then be followed by modest pay rises for exceptional performance.It also calls for the end of corporate benchmarks for setting pay. These have been criticised for ratcheting up top rewards as executives and their pay advisors look primarily at what peers are earning at other firms. LAPPF says companies should also disclose pay ratios between executives and average employees in order to cool public discontent about the disparity of pay within organizations. Notably, it recommends that companies consult regularly with long-term shareholders, both large and small, regarding their views on the company’s pay practices, especially those with a critical view. Pay clawbacks for failures in ESG performance that could impact a company’s reputation or licence to operate are also called for. Kieran Quinn, Chair of the Greater Manchester Pension Fund and Chair of LAPFF, said: “There has been too much emphasis on the structure of pay. In these tough times remuneration committees need to focus more on ensuring that they are not over-paying, and that they are being sensitive to the difficult economic environment they, their investors and their staff face. We have set out some challenging proposals for companies. We hope that, as major shareholders in UK companies, we can provide support for remuneration committees that recognise there is a problem and want to do something about it.”
Click to page 2 for LAPFF pay recommendations:

  • Fixed vs Variable Pay: Ensure that base salary is the primary vehicle for remunerating executives because base salary is, in our view, the up-front negotiated price for doing the job. The variable component of pay should be kept to a minimum for large-cap companies.
  • LTIPs: Phase out the use of long term incentive plans (LTIPs) in favour of company-wide, long-term profit pools that use a straight-forward formula for calculating bonuses based on base salary and seniority.
  • Quantum of Pay: Assess the quantum of total awards of pay packages in determining what would be considered ‘reasonable’ by shareholders and other stakeholders.
  • Pay Inflation: Set the total pay of any new incoming executives (either internally or externally appointed) at a level BELOW that of the outgoing executive.
  • Pensions: Ensure directors and officers participate in company pension arrangements on the same terms as other employees. Where directors or officers receive preferential treatment the reasons for this should be explained.
  • Environmental & Claw-back bonuses and variable pay in cases where ethical Social Performance standards are breached, or where poor environmental or social performance causes demonstrable harm to the company’s reputation or social license to operate.
  • Pay Benchmarks: Discourage the use of market benchmarks for determining comparative pay levels for executives.* Pay Ratios: Publish annually the ratio between average employee pay and average executive pay, as well as the ratio of pay between the top and bottom 10%. Provide a graph charting the pay ratio trends for the current year and the preceding five years.
  • Tax Planning: Ensure that efficient tax planning remains in line with the company’s ethical and corporate responsibility standards. Refrain from using creative tax planning to increase executive pay.
  • Executive Search: Publicly advertise all new executive director positions, accompanied by a job specification document, to encourage robust competition for positions and improve the diversity of candidates.
  • Candidate: Provide a transparent and equal opportunity recruitment process, and Recruitment: give serious consideration to internal candidates for executive director roles.
  • Golden Hellos: Discontinue the practice of paying ‘golden hellos,’ regardless of the individual circumstances of incoming executive directors.
  • Investor Consultation Proactively consult with institutional investors that hold long-term positions in the firm regarding their views on the company’s pay practices. Endeavour to consult with both large and small investors; and in particular, with those that may take a critical view.
  • Employee Views: Consider and include the views and recommendations of managers and employees when making remuneration decisions.
  • Discretion: Use discretion in executive remuneration ONLY to reduce overall levels of remuneration. Refrain from awarding transaction-related bonuses.