A group of pension investment management bodies, Hermes Equity Ownership Services, the National Association of Pension Funds, BT Pension Scheme, RPMI Railpen Investments and USS Investment Management, has jointly issued a set of remuneration principles to guide its investee companies' approach to executive remuneration. The stated aim of the principles is to build and reinforce long-term business success. The principles are that:
- management should make a material long-term investment in shares of the businesses they manage. It is suggested that the best form of alignment between shareholders and executives is the ownership of shares over the long-term and that ideally shares issued to executive directors should be owned for a period of at least ten years, whether or not the executive remains in post. This is significantly longer than the usual three year vesting period under a Long Term Investment Plan
- executive pay should be aligned to long-term strategy and the desired corporate culture throughout the organisation. The intention here is that remuneration committees should design reward packages to encourage executives to behave in a way which will drive long-term success rather than focusing on their short to medium-term performance (with a move away from using metrics, such as earnings per share and total shareholder return, as performance conditions)
- pay schemes should be simple and understandable for both investors and executives and that executive rewards should be linked to returns for long-term shareholders, and
- remuneration committees must be able to fully justify and explain how their decisions will operate to deliver long-term business success. This should include being open to making changes to incentive packages where the overall performance of the company does not support the incentives given to executives.
For more details, please see the guidance.