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Major pension funds and investors lead rethink on boardroom pay

07 February 2013

Pension fund investors are today calling for a major rethink on executive pay to align it more closely with the long-term performance of a business.

Hermes Equity Ownership Services (Hermes EOS), a pioneering stewardship service with over £74 billion* of assets under advice, the National Association of Pension Funds (NAPF), which represents funds with in excess of £900bn, BT Pension Scheme, RPMI Railpen and USS Investment Management have today 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 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 ten 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 both 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.

Following today’s 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.

Jennifer Walmsley, Head of UK Engagement at Hermes Equity Ownership Services, commented:

“Following meetings with FTSE100 companies and many large pension schemes from the UK and overseas, it has become clear there is a growing desire to re-evaluate current remuneration arrangements and embrace a new approach.

“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.”

Joanne Segars, Chief Executive, NAPF, said:

“This is the next stage of a vital conversation with the business world about how it can rethink its approach to boardroom pay. We have become increasingly concerned by the complexity of many spiralling pay deals. We need to see change, and it is encouraging that many companies agree.

“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.

“A chief executive who is partly paid in shares that are held for a decade will think in a timeframe that goes well beyond their leaving party. They are likely to be more focused on the long-term strategic direction of the business, and to plan a smooth succession.

“Pay structures should go right to the heart of what a business is about, and should reflect its values and culture. We look forward to discussing these principles with the UK’s leading companies.”

 

Notes to editors:

  1. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £900 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.
  2. Hermes Fund Managers is a unique fund manager – we have been an industry leader in Responsible Investing for over thirty years. Hermes manages assets on behalf of more than 170 clients across these investment areas with £23.3 billion assets under management (as at 30th September 2012). Additionally, we support pension funds and other global institutional investors worldwide in meeting their ESG responsibilities through our market leading Hermes Equity Ownership Services, which takes on a stewardship role engaging globally on more than £74 billion of assets.
  3. USSIM Ltd (USS Investment Management Ltd) is the investment arm of USS (Universities Superannuation Scheme). USS is the second largest private sector pension scheme in the UK and the principal pension scheme for UK Universities and Higher Education institutions. It has in excess of £34 billion of assets and approximately 285,000 members across 395 institutions.

Contacts:

NAPF press office

Paul Platt, Head of Media and PR, NAPF, 020 7601 1717 or 07917 506 683, [email protected]

Christian Zarro, Press Officer, NAPF, 020 7601 1718 or 07825 171 446, [email protected]

Hermes press office

Asmita Kapadia /Jean Dumas +44 (0)20 7680 2120/2152

[email protected] ; [email protected]

USS Press Office

Andrew Fleming +44 (0)20 3128 8523

[email protected]