One of Britain's leading corporate governance watchdogs has issued a stark warning to institutions to act now over excessive City pay if they want to avoid new laws that force their hands.
Pirc, which advises some of Britain's biggest pension funds on how to vote at company annual meetings, said it was indefensible for executive pay to continue its surge at a time when most ordinary workers are facing pay freezes, if not cuts.
In October, Income Data Services published research showing that the average FTSE 100 director had seen their pay soar by 49 per cent at a time when UK-wide wage growth is under 2 per cent compared to an inflation rate of 4.8 per cent. That means the average UK worker has seen a real-term cut in wages.
Pirc said: "In an environment when many employees are continuing to face pay freezes, or cuts in real terms, allowing executive reward to rise will become highly controversial. If asset managers have any sense, they will need to start taking a view on the scale of reward, and its relation to pay within the company, alongside performance linkage when they come to vote at company meetings."
Pirc has long been urging fund managers to become more actively involved in the companies in which they invest on behalf of their clients, often pension funds or ordinary savers who invest through individual savings accounts, unit trusts or other equity-linked saving plans.
In its end-of-year message Pirc warned institutions that the issue of excessive pay would not go away, and pointed to the praise lavished on the High Pay Commission's sharply critical report on City remuneration by Nick Clegg, the Deputy Prime Minister. It believes that there will likely be reforms imposed on the structure of remuneration committees that set executive pay and new rules to force simplification of pay structures.
Pirc's warning comes just before what is likely to be one of the more subdued investment banking bonus seasons. Many banks have struggled over the past year, and Royal Bank of Scotland notably did not set a penny aside for bonuses after a poor third quarter. But if news of high rewards does seep out, it is sure to be seized upon by the sector's critics. Bank executives' pay is also set to be closely watched when the reporting season starts in February.