February 14, 2013 Pension Funds call for rethink on Executive Remuneration
Major pension funds have published four key principles relating to executive remuneration which they would like to see adopted by FTSE companies.
The most eye-catching principle is that they are calling for executive directors to own shares for at least ten years to encourage focus on genuine long term growth. They even suggest that executive directors should own shares through to retirement age, whether or not they are still appointed as an executive director. This is considerably longer than most current LTIP share schemes and could well be controversial from a corporate governance perspective.
The National Association of Pension Funds (NAPF), the BT Pension Scheme, Hermes Equity Ownership Services, RPMI Railpen and USS Investment Management have published what they are calling ‘Remuneration principles for building and reinforcing long term business success’.
They have set out four key principles which they readily admit are not inline with current market practice. The report suggests that high votes in favour of executive remuneration do not indicate support for current remuneration principles but merely acquiescence to the current market practice. This is clearly quite a claim but one that does have a certain ring of truth.
The four principles the report has outlined are:
- Management should make a material long-term investment in shares of the businesses they manage. The report suggests that long-term should mean at least ten years and, in some cases, until the executive reaches retirement age. This would expose executives to tail-risk and force them to focus on the genuine long-term interests of the company.
- Pay should be aligned to long-term success and the desired corporate culture throughout the organisation.
- Pay schemes should be simple and understandable for both investors and executives and ensure that rewards reflect long-term returns to shareholders.
- Remuneration committees should fully explain and justify how their decisions operate to deliver long-term business success.
There is clearly much to praise in these principles and it does appear that this is the general direction for executive remuneration in the UK. However, there is an element that this is putting the horse before the cart. Pension funds are inevitably long term focused and they do have the ability to push companies more towards long-term thinking. However, while investors and share prices continue to react to short-term factors it will be very difficult to move executive directors out of this short term mode of thinking.
These principles and any resultant guidelines will undoubtedly have an influence in the marketplace considering the authors responsible for them but they will have the most impact if they set out guidelines that chime with the reality of the market. We will wait to see the final guidelines with interest.