The NAPF also set out some guidelines it wants to see reflected in the pay policies set through 2013.
These include capping executive base pay increases at inflation and keeping them in line with the rest of the workforce. Where this is not the case, companies should offer a sound explanation.
The NAPF also criticised the use of peer group benchmarking where pay is set by comparing it to that of other executives from different companies. The NAPF believes this practice has contributed to the escalation of boardroom pay. It said boards should focus more on their own strategies and less on comparing themselves against their peers.
Ahead of the NAPF Investment Conference that opens in Edinburgh on Wednesday Joanne Segars, chief executive, NAPF, said shareholders were vocal last year and those companies that have failed to take a robust stance on boardroom pay should expect similar opposition this spring.
“Too many companies have allowed the link between pay and long-term business performance to weaken in recent years,” she said.
“Companies should keep executive base pay rises in line with the rest of the workforce, and those that deviate from that should have a good explanation ready. Bonus targets should be challenging and allied to the long-term growth of the business.
“Our members will push back on executives who compare themselves with others to try to justify pay rises. So-called peer comparisons have been a major factor behind rising boardroom pay levels.
“The rules on executive pay are set to change with the introduction of a binding vote later this year. It is important that companies and their institutional shareholders work closely together to ensure the new rules deliver high standards.”
Among the pay principles it expects to see applied the NAPF also called for variable pay to be “genuinely stretching” and determined by results that support the long-term growth of the business.
And it told the FTSE 350 it expects remuneration committees to be ready to take a firmer line when finalising bonus payments and share awards. Their decisions must ensure that rewards are aligned with the success of the business over time and that returns on capital are taken into account.
The NAPF and a small group of some of its largest members recently published a discussion paper arguing for a rethink on executive pay. The paper suggested that companies make more payments in shares that are held for the long-term.
Equity Release to Shareholders
Shareholders’ equity (or business net worth) shows how much the owners of a company have invested in the business—either by investing money in it or by retaining earnings over time. On the balance sheet, shareholders’ equity is broken down into three categories: common shares, preferred shares and retained earnings.