The Local Authority Pension Fund Forum (LAPFF) represents pension funds with over £115 billion in assets. LAPFF has recently published guidelines on its expectations for executive pay. These guidelines are intended to identify practical ways to promote alternative strategies of remuneration that are better aligned with long-term, sustainable returns and shareholder value.
The main concerns expressed by the LAPFF relate to two main issues: firstly, executives are being rewarded for failure and, secondly, the belief by some stakeholders that executive pay at UK companies is too high in general. For this reason, the LAPFF has developed a set of expectations for companies on executive pay and it intends to set out a new vision for pay in the UK.
The guidelines strongly encourage remuneration committees at FTSE 350 companies to comply with the following recommendations:
Structure and incentives:
- Base salary should be the primary vehicle for remunerating executive directors. The variable element of pay should be kept to a minimum, only reward exceptional performance, and not be seen as an expected supplement to the base salary.
- LTIPs should be phased out in favour of company-wide long-term profit pools that use a formula for calculating bonuses based on salary and seniority.
- Assess the quantum of total awards of pay packages in determining what would be considered reasonable by shareholders and other stakeholders.
- Set total pay for a new executive below that of the departing executive.
- Directors and officers should participate in company pension arrangements on the same terms as other employees. If they receive preferential treatment, the reasons should be explained.
- Bonuses should be clawed back where ethical standards are breached or where poor environmental or social performance causes harm to the company.
Pay equity:
- Market benchmarks should be avoided.
- Publish annually the ratio between the average employee pay and average executive director pay and the ratio between the top and bottom 10%.
- Tax planning should be in line with the company’s ethical and corporate responsibility standards. Avoid using creative tax planning to increase executive pay.
Executive recruitment:
- Publicly advertise all new executive positions to encourage robust competition and a diverse range of applicants.
- Recruitment processes should be transparent and serious consideration should be given to internal candidates for executive roles.
- 'Golden hellos' should be discontinued.
Consultation:
- Proactively consult with institutional shareholders on pay policies and practices.
- Consider the views of managers and employees when setting executive pay.
- Discretion should only be used to reduce overall levels of remuneration.
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