Investors can do more to rein in U.K. executive pay

By Aimee Donnellan

LONDON (Reuters Breakingviews) - Shareholders can do more to rein in U.K. executive pay. Investor ire over boardroom compensation is on the rise: This year, 61 listed companies have seen a fifth or more of shareholders vote against their pay plans.

To avoid future rows, shareholders are urging boards to bring pension benefits into line with the rest of the workforce and claw back awards when things go wrong. To stop egregious payouts, though, companies also need to cap remuneration.

The U.K.’s Investment Association, which represents big investors, on Thursday outlined ways companies can keep shareholders on side. First, retirement rewards for executives should be no more generous than for other employees. Second, directors should be required to hold onto shares for at least two years after leaving a company.

And finally, boards should have the power to cancel bonuses or retrieve pay that has already been awarded if the company’s reputation is subsequently tarnished.

Corporate disasters have made these changes necessary. The collapse of outsourcer Carillion exposed weaknesses in pay policies that meant investors had little recourse against directors who took generous rewards while driving a company into the ground. The IA’s framework would have included contract clauses allowing the board to take back the rewards.

The focus on retirement allowances also makes sense. Pension payouts, often in cash, have become an increasingly generous portion of executive pay. Tesco pays CEO Dave Lewis an annual pension contribution equivalent to 25 per cent of his salary of 1.25 million pounds (C$2.1 million). Workers in the U.K. retailer’s stores get just 7.5 per cent.

Yet these measures wouldn’t prevent pay debacles like Persimmon. The U.K. housebuilder became the poster child for excessive pay after awarding its chief executive a long-term incentive plan which entitled him to more than 100 million pounds (C$170 million). Although the new guidelines would have enabled the board to take back the rewards because they damaged the company’s reputation, it would have been much better not to give him an open-ended award in the first place.

This suggests boards should also look at total pay and set a limit on how much executives can receive, regardless of performance. If companies and their shareholders don’t get tougher, they run the risk that politicians will do it for them.