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Shareholders prefer simple pay structures
Shareholders prefer simple pay structures; simplicity can be improved by limiting variable remuneration to an annual bonus and one long term incentive scheme Photograph: Adam Gault/Getty Images
Shareholders prefer simple pay structures; simplicity can be improved by limiting variable remuneration to an annual bonus and one long term incentive scheme Photograph: Adam Gault/Getty Images

Curb excessive executive pay rises, insurers tell top companies

This article is more than 11 years old
Association of British Insurers delivers 'keep it simple' message in latest remuneration guidelines as shareholders' representative

Leading companies should avoid handing disproportionately large pay rises to their executives, a powerful body of shareholders has warned in a call for simpler remuneration packages for senior executives.

The Association of British Insurers is also pressing companies to consider ways to reward boardroom directors on measures other than financial performance, in a new set of pay guidelines.

The ABI, whose members control about a fifth of the stock market in pension funds and insurance policies, is asking the committees that set boardroom pay to ensure they award just one annual bonus and one long-term incentive plan (Ltip) in contrast to the range of pay schemes currently offered to top bosses.

On the back of the so-called "shareholder spring", the ABI wants companies to be cognisant of the salaries of employees in the wider workforce when awarding pay rises at the top. While the ABI does not demand that companies publish the ratio between the pay of an average employee and the boss in the boardroom, its comments demonstrate that the pay discrepancy will be one of the issues in focus in 2013.

"Shareholders continue to be mindful of employee costs generally, and executive pay specifically, in the context of the general finances of the company, including its investment and capital needs and returns to shareholders," the guidelines said.

Robert Hingley, the director of investment affairs at the ABI, said: "The ABI guidelines represent UK best practice. They aim to ensure remuneration committees set remuneration structures which are clear and simple, removing unnecessary layers of complexity and ensuring that pay is clearly linked to performance and that shareholders' interests are protected."

It is the latest update to guidelines first produced in the 1970s and which were reviewed in 2011 for the first time in five years when shareholders expressed concern about the spiralling levels of directors' pay, partly caused by the race to keep pace with rises handed to their peers.

No single sector is singled out but the ABI stressed: "Complexity is discouraged. Shareholders prefer simple and understandable remuneration structures; simplicity can be improved by limiting variable remuneration to an annual bonus and one long term incentive scheme."

The guidelines were welcomed by the Department for Business, Innovation and Skills (BIS) which is introducing measures to give shareholders more powers to clamp down on boardroom excess. From next year, firms will be required to publish a single number for an executive's pay to avoid the situation where numerous figures can be produced due to the complexity of bonuses awarded in the past and in current years.

"We welcome the ABI's emphasis on simplicity in pay and long term incentives linked to company strategy and performance. We encourage all shareholders to engage with the companies they own and drive this change, and with the new reforms we are bringing in next year, they will have even more power to do so," BIS said.

The ABI called for the proposed disclosures from companies to include details of basic salary, with the scope for rises in the future; annual bonuses; the grants of shares as long term incentives, when those plans will pay out including pension provision.

"Under the current [BIS] proposals, there is no specific requirement for companies to disclose the [remuneration] committee's positioning of remuneration potential against peers. Investors find this form of disclosure informative and think it should be included as a matter of course," the ABI added.

The ABI repeated its concern about the "quantum of remuneration". "Undeserved remuneration undermines the efficient operation of the company. Excessive remuneration adversely affects its reputation and is not aligned with shareholder interests. Shareholders are likely to object to levels of pay that do not respect the core principles of paying no more than is necessary and a linkage to sustainable long- term value creation," the guidelines warn.

The ABI also warned that annual meetings in 2012 had shown shareholders were prepared to vote against or abstain in the votes for non-executive directors, who must now stand for annual re-election.

"Shareholders will scrutinise but not micro-manage" setting of executive pay, which is carried out by non-executive directors.

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