Guidelines on executive pay from an influential representing asset managers contain a warning for remuneration committees that “benchmarking” alone to justify big rises is “not appropriate” and can “cause a ratchet effect in the market” for pay.

The warning comes from the Investment Association (IA) in new guidelines that follow a year in which senior City figures have argued stridently for a significant increase in executive pay if UK companies are to compete for talent internationally.

The guidelines, which simplify an earlier set of principles, are viewed by some, according to the Financial Times, as creating “greater flexibility” for higher salaries. Others see them as falling far short of backing excessive pay deals.

Andrew Ninian, director of stewardship at the IA, says: “Our principles set out the main areas that investors are interested in, stress that each company should adopt a structure that makes sense for its business and the market it operates in, and that we expect early engagement on any potential novel changes.

‘Important role’

“Investors want to see companies succeed and deliver long-term returns to their shareholders, with the structure of executive pay playing an important role in driving and rewarding these results.”

The guidelines warn remuneration committees that pay levels should be set on a “case-by-case” basis and come with a “clear rationale” for how they “align” a company’s “purpose, values and strategic goals, and how they help attract, retain and motivate talent.”

Companies are also expected to address where they compete for talent with remuneration committees “encouraged to set out the impact of attracting global talent on the positioning of remuneration”.

However, employees are to be considered as part of an executive pay calculation. “Committees,” the guidelines say, “are expected to consider the company’s material stakeholders, when setting remuneration levels and structures, such as the workforce.”

A desire in some quarters to see higher CEO pay levels was announced in May last year when London Stock Exchange chief executive Julia Hoggett published a blog warning of “consequences” if pressure to repress pay levels was maintained. A City lobby group, the Capital Markets Industry Taskforce (CMIT), chaired by Hoggett, has continued the campaign since then.

The blog caused a stir in an investment community still adjusting with the effects of a cost-of-living crisis.

‘Naughty step’

Hoggett’s intervention, against scepticism from academics, think tanks and some City grandees, gained traction. By May this year, she boasted that remuneration committees were willing to sit on the “naughty step” to accept shareholder disapproval over increased pay levels.

In August, the High Pay Centre, a think tank, found that median FTSE 100 pay had reached its highest ever level at £4.19m.

The Investment Association’s revised principles say that the drop in opposition to pay resolutions in this year’s AGM—which included many big pay hikes, among them the chief executive of the London Stock Exchange Group, Hoggett’s boss—“reflects the strong alignment between shareholders and companies”.

However, there are warnings. While broadly welcoming the IA’s guidelines, The Chartered Governance Institute says higher pay is not a “magic wand”.

“Paying executives more will not automatically raise corporate performance, nor will it fix low productivity, weak innovation and low levels of investment,” says Peter Swabey, director of policy and research at the institute. “Variable pay KPIs can be developed to help address these issues but, in the long run, employee productivity and workplace culture are both more important factors in organisational performance than executive pay.”

For some, the key element in the guidelines is its stress on dialogue with investors and the alignment of pay with performance, a reminder that higher pay levels should have a compelling rationale and of past claims that the City offered “rewards for failure”.

Involving shareholders

Jen Sisson, chief executive of the International Corporate Governance Network (ICGN), another club for fund managers, stressed the need for boards to listen to shareholders on “contentious issues”.

“We are seeking the same goal,” she says, “to promote the long-term success of the company, so while views on the right answer might vary, it is important to be open to discussion and seek the understanding and approval of shareholders on the best way to incentivise management teams who are working on their behalf.”

The High Pay Centre considers the new guidelines “pretty nuanced” and not necessarily an endorsement of the argument for steep pay hikes.

Luke Hildyard, director at the High Pay Centre, says the guidelines’ stress on setting pay on a “case-by-case” basis should exclude most companies from using US pay levels as a benchmark while it also implies a belief that the UK has a “different economic culture to the US”.

He says further emphasis on “early engagement” in the guidelines suggests asset managers won’t just “wave pay increases through”.

Hildyard adds the guidelines apply “a fair bit of overdue scepticism to the slightly hysterical claims about executive pay voiced by some in the business and financial services lobby.”