UK fund managers members take executive pay reform seriously according to the UK's Investment Association, which this week responded to the recommendations of the Executive Remuneration Working Group. In its new Principles of Remuneration, the IA suggests that rather than opting for the default Salary/Bonus/Long Term Incentive Plan (LTIP) pay structure,  firms should consider pay structures which fit their business and strategy.

In a bid to encourage simplicity and flexibility in executive pay structures, the fund management trade body has revised the Investment Association Principles of Remuneration and sent an open letter to remuneration committee chairmen of FTSE 350 companies detailing the changes. As a precursor the the 2017 AGM season, they have also outlined the issues their members are likely to focus on when considering triennial binding pay policy votes.

Levels of pay, not just design

Reflecting wider political concerns about chief executive pay rates, the IA is calling on boards to take action on the levels of pay. Specifically they are encouraging disclosure of pay ratios between the chief executive (CEO) and median employee, and the CEO and the executive team in order to provide investors with the context they need to understand the scale of the awards been given.

The IA said that the updated principles make it clear that it is essential that company boards provide investors with clear justification around their executive’s levels of pay. This should be both in terms of the maximum potential remuneration as set out in the remuneration policy, but also payments actually made to the executive during the year in the context of the company’s performance.

In the letter Andrew Ninian, IA director of corporate governance & engagement wrote,  "The level of remuneration awarded to executive directors continues to be an area of particular concern for members, as well as society as a whole, with the current economic and political climate also contributing to the level of scrutiny. Members continue to pay close attention to levels of remuneration, and it is essential that companies adequately justify the level of remuneration awarded to executives."

During the 2016 UK AGM season shareholders showed they were prepared to vote against pay rewards they felt were not justified. The most notable examples were at BP where investors were unhappy about the level of pay given to its  CEO Bob Dudley and also at Smith & Nephew following concerns about its annual incentive plan and performance share awards scheme.

Executive Pay and Equity

Meanwhile Theresa May, the prime minister, has been among those politicians questioning the high level of executive pay. For the first time the IA members have addressed the issue of pay fairness between the board and the rest of the workforce and is calling for clear justification of any differences.

Ninian said, "Issues surrounding executive pay are a growing concern for investors, politicians and society as a whole. Following the work of the Executive Remuneration Working Group, the Investment Association and its members felt that it was vital to update our principles to ensure that we are not only acting as responsible stewards for our clients but also show that we are aligned with the current climate."

Improved Shareholder Consultation

The letter also reminds remuneration committees of the importance of discretion. Remuneration committee discretion can ensure that the remuneration outcomes are appropriate for the overall performance of the company, shareholder experience, and fair to executives. To that end the updated Principles encourage boards to improve shareholder consultation on remuneration issues and to ensure that this engagement is based upon how pay is in line with the company’s strategy. “Our new Principles are designed to offer a market-based solution to add simplicity and flexibility. It is vital that companies have the opportunity to choose the right structure for their business and this must be done in close partnership with their shareholders." said Ninian.