UK-based institutional investors favour executive pay linked to performance

LONDON | A study by The Share Centre revealed that there is a clear rejection among institutional investors with companies with director-level remuneration that often bears no relevance to the business model or the strategy of the organisation. The Accountability in Business report, which provides an inside-look at corporate governance amongst specialists and fund managers, highlighted this week a widespread belief that executive pay has become disproportionate to performance.

Over 95% of institutional investors think executive pay has become too high. There is a unanimous conviction that it is now excessive, with the substantial majority of respondents, 83%, in favour of claw-back arrangements stating it would help to improve the link between salary and achievements.

Gavin Oldham, chief executive at The Share Centre, said:

“It is understandable that there is so much concern about executive remuneration at a time of austerity following the financial crisis. While we recognise the need to reflect market comparisons, these need to be much more closely scrutinised, particularly with respect to the performance and risk exposure of top earners.

“Meanwhile, there should be far more sensitivity shown in setting both salaries and bonuses, with the multiple between highest and lowest earner (full-time equivalent basis) being disclosed in companies’ annual reports.”

When examining reasons why executive pay has risen to its current level, 56% of respondents stated benchmarking against other companies as an issue, particularly the growing use of international peer groups as a yardstick, using data from other markets where pay has traditionally been higher than the UK. In addition, 38% thought institutional investors were in some way to blame for the increase, citing lack of engagement by institutions, a focus on the wrong elements of remuneration and encouraging inappropriate targets as core reasons. There was a very strong view that companies should consider the impact on employees when setting executive pay, with 88% believing this should be done.

This is particularly important especially when redundancies are made at the same time as record bonuses are being paid to top earners. But despite criticisms, only 18% said they were increasingly asking companies about the relationship between executive and employee pay and requesting that they justify pay rises when rewards for the rest of their workforce were not increasing.

A further 12% said that there was still inequality between male and female board level salaries.  A quarter of respondents (24%) called for more analysis in this area and noted that there are too few female executives for proper comparisons to be drawn. A number believed the lack of women on boards was the key issue, rather than pay levels.