UK pension scheme investors outline new principles on executive pay

The NAPF, which is a membership body representing more than 1,300 UK pension schemes, has outlined five new principles (4-page / 219KB PDF) it is encouraging businesses to adhere to on the subject of executive remuneration. It said that remuneration committees within organisations should "expect executive management to make a material long-term investment in shares of the businesses they manage".

"While we recognise that flexibility is needed to ensure that effective executives are appropriately remunerated, remuneration committees should strive to ensure that, to the extent this is feasible and appropriate, the bulk of their variable rewards flows over time from the benefits of being an equity owner," it said in a document outlining the new principles. The BT Pension Scheme is among a handful of other groups to have helped form the principles.

The NAPF also said executives' pay should be "aligned to long-term success and the desired corporate culture throughout the organisation" and called for clarity in how the pay schemes within businesses work for both investors and executives. Rewards given to executives should "properly reflect business performance" and companies should engage with investors regularly on strategy and long-term performance, it said.

"We strongly believe that the time is right for companies and investors to fundamentally rethink their approach to executive remuneration," the NAPF and other backers of the principles said. "We are confident that there is a significant appetite for change among many to consider how they may more closely align pay with the interests of their long-term owners in order to position themselves best for future success."

"The ... principles do not seek to prescribe any particular structure or model of remuneration. Instead we encourage companies to innovate and come forward with proposals which are most appropriate to their own business model. We stand ready to support this change which we believe is in the interests of both companies and their investors," they added.

Corporate law expert Jennifer Malcolm of Pinsent Masons, the law firm behind Out-Law.com, said that the principles will allow company shareholders to compare remuneration of board members against a benchmark with the opportunity to vote against remuneration plans at the following year's annual general meeting.

"In recent times there has been a strong appetite for transparency around and change to directors pay and to reinforce that message ahead of the 2014 AGM season the UK's pension funds have made it clear that they believe that boards should focus on supporting the long term growth of companies and making sure there is meaningful dialogue between long term shareholders and their companies," Malcolm said.

Joanne Segars, NAPF chief executive, said: "The NAPF’s priority is to maximise the long-term returns of our members’ assets, irrespective of the potential for short-term discomfort. Our guidelines aim to support our members in promoting the success of the companies in which they invest and ensuring that the board and management of those companies are held properly accountable to their shareholders."