Investors clamp down on executive pension perks

Investors will be clamping down further on executive pension perks in a move to promote fairness and good employee relations, the Investment Association's (IA) updated annual pay guidelines for companies reveals.

Previously, it was common for pensions contributions for executives to be considerably higher than for the wider workforce. Although significant progress has been made on bringing executive pension contributions in line with the majority of the workforce, investors, having called for this in previous years, will now be taking a stronger stance against those companies which have yet to take sufficient action.

In a letter sent to the Chairs of Remuneration Committees of FTSE 350 companies, the IA informed companies that its Institutional Voting Information Service (IVIS) will be giving a red-top, its highest level of warning, to those that fail to draw up a credible action plan to align incumbent directors’ pension contributions by the end of 2022, if they are 15 per cent of salary or more. This lowers the threshold from last year, which was set at 25 per cent of salary. New executive directors are expected to automatically join with a pension contribution aligned to the workforce rate.

As the IA set out in March, investment managers want to support companies through the pandemic to ensure they remain good investments over the long-term. This has been demonstrated through ongoing support and the provision of additional capital, with over £18 billion raised by FTSE All Share companies since the start of March.

However, in light of coronavirus, investors have again cautioned companies to treat their executives in line with the rest of the workforce and remain mindful of the pandemic’s impact on society. Firms are expected to balance the need to incentivise executive performance, while reflecting the experience of investors, employees, and other stakeholders. As a result, investors have warned remuneration committees not to compensate executives for reduced pay as a result of the pandemic by adjusting next year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases. Investors also do not generally expect bonuses to be paid if a company has taken government or shareholder support – any company that choses to do so is expected to provide a clear rationale.

Andrew Ninian, Director of Stewardship and Corporate Governance at the Investment Association, says: “With coronavirus continuing to hit household finances across the UK, investors expect companies to treat their executive directors and workforce consistently when it comes to pay. Investors will be paying close attention to ensure pay remains linked to the experiences of shareholders, employees and other stakeholders.

“Aligning executive directors’ pension contributions with the rest of workforce is fundamentally an issue of fairness. Investors have already played an important role in bringing about change and today’s announcement will further increase the pressure on those companies that have yet to take action.”