Britain's biggest pension funds have called for a radical overhaul of boardroom pay in an effort to end the "jackpot" payouts to top bosses.
The pension funds, led by the influential Hermes Equity Ownership Services, are calling for an end to three-year bonuses linked to earnings per share and a replacement of these long-term incentive plans by a simple method of cash bonuses and awards of shares that must be held for the longer term.
Colin Melvin, chief executive of Hermes EOS, which is owned by Britain's largest occupational pension fund at BT, said the reform was needed because "we are at a moment of crisis in the evolution of publicly listed companies and their relationship with their shareholders, with a poor economic backdrop and minimal growth intensifying the need for reform". He said the complexity of boardroom pay meant that when executives received bonuses based on earning per shares over three years they regarded it as "like winning the jackpot" even though their pay deals were so complex that it was not obvious what targets they had to hit to achieve the payouts.
Hermes EOS and the National Association of Pension Funds discussed the ideas for changes at a meeting last month with remuneration committee chairmen from almost half the companies in the FTSE 100. David Paterson, head of corporate governance at the NAPF, will now set up a high-level working group of pension fund investors and remuneration committee members to devise ways to better link pay to performance that are expected to be based on the Hermes EOS ideas.
Hermes EOS is publishing its discussion paper at the same time that business secretary Vince Cable – who attended the meeting last month – is consulting on how to hand investors a binding vote on pay, in addition to the current vote on remuneration reports which has been in place since 2004. Cable's department discussed the consultation with investors on Monday.
Hermes EOS warned that a binding vote could have "significant unintended consequences" by making shareholders less likely to vote.
Melvin acknowledged that ideas set out by Hermes did not directly address the exact period that pay should be measured over or how much directors should receive. "We do need to [resolve] … how much is too much and how long is long term," said Melvin.
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