Amid an ongoing debate about pushing up executive pay, investors this week warned that pay rises should be tightly related to performance and companies should be “cautious” with pay awards this year.

The Investment Association (IA), a club for fund managers, issued the warning in an open letter to FTSE 350 remuneration committee leaders.

The letter acknowledges demand in some circles for increased pay levels to maintain London’s competitiveness, but then immediately signals that this cannot be pay for its own sake.

“As a fundamental principle, to support higher potential pay levels, there needs to be clear alignment between pay and performance.”

The letter, drafted by the IA’s stewardship director David Ninian, adds: “Whilst inflation has fallen significantly in the last year, it is still relatively high, so investors would expect companies to remain cautious in 2024, being clear as to how they have considered salary increases for executives in the context of all-employee salary increases, the impact on total remuneration for the executives and putting executive remuneration in the context of the stakeholder experience.”

The IA says it is now undertaking a review of its own guidance on executive pay.

Against the tide

The intervention comes a week after it emerged that the London Stock Exchange Group was considering a significant pay rise for chief executive David Schwimmer. According to a Sky News report, a revised remuneration policy would see his total pay package rise to £11m, from £4.7m. The Financial Times later ran reports that LSE Group was using US data to benchmark Schwimmer’s pay.

Julia Hoggett, chief executive of the London Stock Exchange, had made efforts last year to start a debate over the need for higher executive pay.

In a blog on the LSE’s website, she wrote: ““We should be encouraging and supporting UK companies to compete for talent on a global basis, so we remain an attractive place for companies to base themselves, stay and grow.”

This caused observers at the High Pay Centre, a think tank, to label the post “tone deaf”.

The IA has been consulting with its members and remuneration committee chiefs. Last year, it says, remuneration was less contentious with investors, with an 18% drop in the number of pay resolutions meeting with significant investor dissent (20% or more).

The letter also reveals that a “small number of companies” are currently in talks with investors over pay and that “shareholders are willing to consider proposals on quantum and hybrid schemes”.

Pay remains contentious, but there are clear efforts under way to see higher pay as a boost to both UK competitiveness, and the competitiveness of the LSE compared with other stock exchanges, such as New York. However, the IA’s letter will give some boards pause for thought before ordering big rises.