Top FTSE 100 investor: board pay must be in line with workforce

While base salaries often represent a small part of executives’ rewards, most bonus plans are set at a multiple of salary

One of Britain’s biggest investors has used its annual governance report to urge companies to stop executive salary increases getting out of proportion with pay deals handed to their wider workforces.

Sacha Sadan, director of corporate governance at Legal & General Investment Management (LGIM), said high levels of executive pay “quite rightly remain a burning issue with the media and the British public”.

Writing in a blog post alongside the release of the report, he went on to say: “There’s a requirement to place a cap on the level of salary increase granted each year to executives. We support those companies who choose to state that salaries increase in line with the general workforce, unless there were changes to the role of the individual.”

Mr Sadan’s words come amid growing discomfort over the level of some executive pay awards, which has even been reflected in parts of the business lobby.

On Thursday The Independent reported on the quiet crusade of Dominic Rossi, global chief executive of the fund manager Fidelity, to get companies to reform the way they pay bosses. Fidelity has been voting against companies’ remuneration reports at shareholder meetings unless they extend the minimum holding period for shares granted under “long-term incentive plans” to five years, from what has typically been three.

But earlier this month the High Pay Centre, an independent think-tank, said the plans, which have allowed bosses to collect millions of pounds’ worth of free shares, damaged companies and should be scrapped out right. The report was funded by Lord Sainsbury and senior figures from the Institute of Directors sat on its oversight committee.

While base salaries often represent a small part of executives’ rewards, most bonus plans are set at a multiple of salary – so any increase in basic pay can telegraph through an entire package.

Mr Sadan went on to criticise companies for sometimes failing “to explain how the performance metrics they choose to drive executive pay would also drive their long-term strategy”.

LGIM manages several stock market index tracker funds, and as a result has become the biggest investor on the FTSE 100. It has said that if executive salary rises are “out of kilter” with those handed to wider workforces, it will vote against company remuneration reports.

The Department for Business, under the former secretary of state Vince Cable, enacted several notable reforms to the way in which companies are required to report on executives’ pay.

As well as handing investors a three-yearly, binding vote on pay policy, companies are now supposed to report on the maximum, in monetary terms, that may be paid under a remuneration policy. However, a recent review of companies’ compliance with this requirement found it to have been poor.

The TUC General Secretary Frances O’Grady said: “It’s welcome to see Legal & General recognising the importance of addressing pay inequality, and we need every major FTSE investor to take responsibility for boardroom compliance with executive pay reporting requirements. But bringing top pay rises in line with those of their employees makes far too little difference if it only applies to salaries and not total pay.”

One governance expert described LGIM’s position as “good”, but added: “The real inflation comes in the variable part of pay these days. Executives can handle modest increases in salary if the maximum available under incentive schemes keeps on edging up.”