(February 7, 2013) — Some of the loudest voices in European pensions have thrown their support behind a challenge to the corporate sector to create long-term pay structures for senior officials that should improve financial outcomes for investors.
The UK’s National Association of Pension Funds (NAPF), which represents hundreds of billions of pounds in retirement assets, and Hermes Equity Ownership Services (EOS), which engages with companies on behalf of the largest UK pension fund – telecom giant BT – and other smaller schemes, have published guidelines for corporate entities to follow.
The two organisations launched the project a year ago using a meeting with representatives of 44 of the largest publically owned firms in the UK to garner sentiment for change.
Today, the results of a year-long investigation and discussions with investors and company bosses have been published, stating four main points.
Firstly, management should be made to make material long-term investments in shares of the business they manage, the groups said. “Shares granted to executive directors should ideally be owned for at least 10 years, whether or not the executive is still in the post. In some situations it may be appropriate for a proportion of shares granted to be held until retirement, even if the individual leaves the company.” They recommended that a proportion of fixed pay should be paid in shares that would be held until the executive gave up work for good.
The groups added that CEOs rarely remained at the same company their entire career, but rather than create remuneration policies that flexed around this issue, businesses should target longer tenures for their executives.
Secondly, the report said measurements “such as earnings per share and total shareholder returns have been over-emphasised, with little regard for the company’s strategy or the time frame in which that strategy should be achieved”. It said that the firm’s strategic plan should be taken into account when creating pay structures, which included making sure staff in high-ranking positions did not receive greater pay increases than less senior workers.
The report added that executives’ success should also take into account their succession planning and agree “acceptable parameters for pay” at the initial hiring phase of new joiners to executive roles rather than wait until a candidate is successful before beginning to barter about remuneration.
The third point made in the report was purely that pay and reward structures should be simple and understandable for both investors and executives and that it reflected long-term returns to shareholders.
The final point made in the report asked companies to demonstrate how results, which led to remuneration awards, were achieved rather than just stating that they happened.
“If targets have been met by more aggressive accounting policies, by deferring important investment in the business or by unnecessarily increasing leverage, then the remuneration committee should consider scaling back or eliminating awards,” the report said.
Joanna Segars, chief executive of the NAPF said: “Shareholders want a much simpler approach that nails boardroom pay to the long-term health of a business. Pay structures should go right to the heart of what a business is about, and should reflect its values and culture.”
For an in-depth interview with Joanne Segars, see aiCIO‘s January/February edition published at the end of this month.