The NAPF has written to the Chairmen of all FTSE 350 companies urging executive pay restraint and making it clear that company remuneration should be aligned with the long-term interests of shareholders, including pension funds. The letter suggests that a review of accepted best practice is warranted as it ‘serves neither shareholders nor management well’.
Even prior to the current crisis, Manifest raised concerns as to whether the current structure of the best practice guidelines were fit for purpose. That this debate is now being taken forward by the NAPF is certainly welcome.
Some of the key points made in the NAPF letter are:
- Bonuses are seen as a form of profit-share and if profits are down, the NAPF expects bonuses to be lower.
- Companies should pay close attention to how profits are apportioned between retentions (which provide the capital to finance future growth), remuneration (especially bonuses) and dividends to shareholders.
- Deferral of a significant part of any bonus payments into shares is good practice.
- They accept accept that the performance conditions set in many share plans are no longer realistic, awards should be reduced if lower hurdles are set and performance conditions should take account of the potential for recovery in profits as we come out of the recession.
This last point is especially crucial, as no executive should be potentially rewarded with lottery style payouts based on cyclical cycles (as was the case with Mick Davis at Xstrata last year). The policy of making grants at a stated percentage of salary based on the market price of shares risks alienating shareholders given that it effectively rewards executives with mega-sized share awards granted at or near the bottom of the cycle.
The use of relative TSR-based performance measures should be re-examined too and consideration given to the use of KPI-based measures more aligned with the company strategy.