The National Association of Pension Funds has written to the chairmen of FTSE 350 companies recommending executive pay restraint and an increased focus on the alignment of remuneration with the companies’ results and long-term interests of shareholders.
NAPF’s key recommendations are:
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Accepted best practice should be reviewed. The aim should be to better align interests of management and shareholders in the long term. Management should be exposed to significant financial risks if they fail to achieve agreed goals, by awarding them share bonuses rather than cash and ensuring that they build up material shareholdings.
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Pay and performance need to be clearly aligned. As bonuses are a form of profit share, lower bonuses should be awarded by companies when they make lower profits.
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Boards should pay attention to apportionment of profits between retention of capital, remuneration and dividends to shareholders and should address how these demands have been met in the annual report.
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The current trend of deferring parts of bonus payments into shares is good practice and more companies are expected to follow this path in 2010.
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Companies and shareholders need to reconsider the model for measuring performance, is measured.
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Shareholders should remain vigilant and ensure that boards are held to account for remuneration policies, both through ongoing discussion and the use of votes at AGMs.
The full text of the NAPF press release and letter can be found here.
