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Major UK investors team up to tackle 'complex' executive pay

The way in which executive pay is often structured in UK public companies can be "complex", making it difficult for investors and the public to understand the link between performance and reward, according to an influential trade body.

The Investment Association (IA) has set up a new 'Executive Remuneration Working Group' to tackle the perceived problem, including by making recommendations for a "radical simplification of executive pay", according to an announcement. The IA represents the UK's £5.5 trillion investment management industry, and publishes influential 'principles of remuneration' to assist its members when making their binding shareholder vote on executive pay.

IA chief executive Daniel Godfrey, who will sit on the new working group, said that executive pay awards that appeared disproportionate were "an increasing source of reputational damage to business and of concern to investment managers".

"Complex pay structures can make it difficult for investors and the wider community to judge whether high rewards are being earned for exceptional management performance or mediocre performance flattered by favourable external factors," he said. "Simplification will help our members in their engagement with companies with the objective of supporting strategies and incentives that lead to long term, sustainable wealth creation for the benefit of our clients, the companies themselves and the economy."

Executive remuneration expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that although the IA's continued focus on simplicity was welcome, managing complex international businesses was not.

"Assessing how to link pay to performance in a simple way will not be without difficulty," he said.

"Arguably, the structure of executive pay is not complicated – salary for the day job, annual bonus for single-year performance and a long-term incentive plan (LTIP) for long-term performance. It is the detailed terms and overlapping governance requirements which make it so – for example, malus and clawback, post-vesting holding periods and share ownership guidelines," he said.

Quoted companies have been required to include more information about how directors have been and will be paid along with how this relates to company performance in their annual reports since October 2013. This information can then be used by company shareholders when exercising their legally-binding vote on the company's directors' remuneration policy.

The IA is the trade body which represents the interests of the investment management industry, including both retail and institutional assets. It updates its remuneration principles annually to take account of any trends and events emerging from the previous corporate AGM season, and usually writes to remuneration committee chairmen at the same time, to highlight topical issues of concern to its members regarding executive pay. The IA also reviews quoted company annual reports and general meeting resolutions and, through its research arm IVIS, prepares compliance reports for members and subscribers.

"We understand that the IA plans to stick to its usual schedule for reviewing its remuneration principles and writing to remuneration committees in 2015," said share plans and incentives expert Lynette Jacobs of Pinsent Masons.

"The timing of the review is interesting, as the next substantial wave of remuneration policy renewals will occur in the 2017 AGM season, as the law requires new policy approvals at least every three years. Potentially, the IA working group report will have been assessed and considered in good time to influence how companies design the policies they will propose in 2017," she said.

The working group will include Russell King, a non-executive director and chairman of the remuneration committees of Aggreko and Spectris, and expects to publish its proposals in spring 2016, according to the announcement. Its membership is drawn from both the investment industry and quoted company non-executive directors, and includes Legal and General group chief executive Nigel Wilson, Sainsbury's chair David Tyler and Helena Morrissey, who is the chief executive of Newton Investment Management as well as chair of the IA.

Any interested parties that wish to contribute to the project should contact the new working group's secretariat, which is headed by the IA's director of corporate governance and engagement, Andrew Ninian, the trade body said.

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