Friday, December 9, 2022

UK’s top fund managers tell FTSE companies to rein in CEO pay

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The UK’s top fund managers have told company boards to keep pay for chief executives and other senior managers “in check” this year to reflect the pain being inflicted on many of their staff by the cost of living crisis.

In a letter to the heads of remuneration at FTSE-listed companies, the Investment Association, which represents British fund managers, called for restraint on executive salary increases this year as many UK households struggle financially.

The letter, which reflects its annual pay guidelines and principles for FTSE companies, comes after PwC this week found that CEO pay in the FTSE 100 was at the highest level for at least five years, having soared by almost a quarter in 2022.

Average total pay for FTSE 100 chief executives increased by 23 per cent to £3.9mn in 2022, boosted by record levels of bonus payouts as executives hit targets often set at low levels during the pandemic.

The IA principles, which set out what investors will be looking for from companies on executive pay in the 2023 AGM season, signal the likelihood of bruising encounters between companies and their shareholders next year.

Companies have complained that they are not able to pay their top executives at levels in line with global rivals, even while many are trading well in sectors and countries that are unaffected by any British domestic economic slowdown.

But Andrew Ninian, director of stewardship and corporate governance at the IA, urged boards to consider macroeconomic challenges affecting the global economy, including the impact of the invasion of Ukraine, the resulting increase in energy prices, the wider cost of living crisis and the inflationary environment. The IA’s 250 members manage £10tn of assets.

He said fund managers wanted companies to “sensitively balance the need to continue to incentivise executive performance and ensure the executive experience is commensurate with that of shareholders, employees, and those most impacted by the cost of living crisis”.

The IA urged companies to consider “additional restraint” to bring salary increases below inflation. It noted that even small rises would have a greater impact on the overall remuneration of a CEO than for a lower-paid worker “where a greater proportion of their income will be spent on energy or food”.

The letter said that “if salary increases are needed, IA members encourage committees to consider increases below the rate of salary increases given to all employees”.

The IA expected the majority of companies would seek shareholder approval for their remuneration policy next year. On variable pay such as bonuses, it said companies should also show restraint on increases and “may require wider performance ranges and discretion”.

The trade association also warned against chief executives benefiting from “windfall” payouts from longer-term incentive packages made in 2020 at easy to reach levels.

These decisions were often made following significant pandemic share price falls, so a greater number of shares were granted compared with previous years. However, many companies bounced back strongly as Covid-19 lockdowns ended.

Ninian said that “to ensure that participants do not benefit from being granted significantly more shares, it is important [to] consider if vesting outcomes need to be reduced”.

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