Out-Law News 2 min. read

ABI guidance outlines investor concerns about the size of directors' pay packets


Shareholders should be actively involved in deciding how much board directors are paid and should "strongly resist" bonus payments when a company does not perform well, the latest edition of influential guidelines has said.

The revised Principles of Executive Remuneration, published by the Association of British Insurers (ABI), explicitly deals with investor concerns about the amount directors are paid for the first time, the organisation said in a statement.

The new edition of the guidelines warned against "crude benchmarking" with competitors being used as a reason to justify pay increases. "The constant chasing of perceived median has been a major contributor to the spiralling levels of pay," the guidance said, according to press reports.

The ABI represents the interests of over 300 insurance companies accounting for 90% of insurance premiums paid in the UK. It has published its Principles of Executive Remuneration since the 1970s, with the last edition published in 2007.

ABI members believe that non-executive directors should have a substantial role in determining executive pay and that shareholders should be actively involved while avoiding micro-managing companies, the ABI said.

The new guidance was published a week after the Government announced a discussion paper on executive pay, which considers options such as 'clawing back' bonuses and whether worker representation on pay committees would help to curb high pay where this does not correspond with company performance. The consultation will look at the possibility of forcing companies to publish information on the link between company performance and executives' earnings, as well as the ratio between chief executive pay and the average pay for an employee of the firm.

The Government is also looking to clarify "unwieldy, complex and hard to understand" annual reports in a further consultation, which it said could lead to more transparency on executive pay deals. It is seeking responses on both documents until 25 November.

"The key principles in the ABI's guidance match what we have found in our conversations with shareholders, investors and business leaders so far – that excellent performance should be rewarded, but that there is a strong need to end 'reward for failure'. So we welcome the ABI's revised guidance," a spokesperson for the Department of Business, Innovation and Skills said in a statement.

The ABI also announced its first report on Board Effectiveness. The report focuses on diversity, including the number of women on boards, succession planning and how best to tackle risk.

The report highlights existing best practice among FTSE 350 companies and makes clear that an effective board and successful company depends on greater progress and transparency on these issues, the ABI said.

The two publications "represent UK best practice" said Otto Thoresen, Director General of ABI.

"Effective boardrooms should be the powerhouse of the UK economy... we continue to favour evolution, building on what we have learnt from recent years to make sure companies act in shareholders' interests and deliver long-term economic growth that will benefit society as a whole," he said.

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