The Investment Association (IA) has told senior management of FTSE companies to show additional restraint in executive salary increases as the UK faces the cost-of-living crisis.
Ahead of the 2023 AGM season, IA sent to remuneration committee chairs in which investment managers warn poor decisions around executive pay could negatively impact the productivity of the whole workforce.
It comes after PwC published research earlier this week on the rise of FTSE 100 chief executives’ pay soaring by an average of 23% at a time when workers are seeing real terms pay cuts. IA added this period of significantly higher inflation and economic uncertainty places additional pressure on lower-paid workers.
“The current inflationary impact is disproportionately affecting lower-paid workers, where a greater proportion of their income will be spent on energy or food, which is seeing the greatest levels of inflation,” the letter stated.
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The group recommended lower executive pay increases: “Boards will have to consider the delicate balance between the need to incentivise executives and employees throughout the organisation, and how this might impact the productivity of the whole workforce.
“If salary increases are needed, IA members encourage committees to consider increases below the rate of salary increases given to all employees. All salary increases, and particularly significant salary increases, will have to be carefully justified in the wider stakeholder context for the company,” companies were told.
As part of its Principles of Remuneration, IA stated it will be issuing a “red top” for any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce.
Andrew Ninian, director for stewardship and corporate governance at the IA, said: “With the cost-of-living crisis hitting UK households, investors want to see companies show restraint on executive pay and bonuses, ensuring that executive pay packets are balanced against the experiences of their wider workforce, customers, and other stakeholders.
“While we know from our discussions with companies that many are targeting salary increases to lower paid employees, it is imperative that all companies carefully consider how they award pay to promote the long-term success of the business.”
The PwC research showed average total pay of CEOs has returned to pre-Covid levels, increasing from £3.2m in 2020/21 to £3.9m in 2021/22, driven by an increase in annual bonuses. Neville White, head of RI policy & research at EdenTree, said the 2022 strong bounce back in bonus culture is “unjustifiable in the midst of an economic downturn”.
“For the first year since we began consistent voting on executive pay, EdenTree has been unable to support any FTSE 100 remuneration policies or reports, opposing all those that have come before us. In addition, we continue to see a disagreeable trend towards Restrictive Share Plans that have no performance metrics attached, on grounds of poor visibility around economic metrics going forward.
“Unfortunately, we have also seen individual examples of Remuneration Committee discretion being applied to change or manipulate performance metrics in order to pay out. At a time of increasing economic hardship, this somewhat ‘tin-eared’ response by executives to their own rewards sets a particularly poor example.”