Investment managers have urged FTSE 350 businesses to rein in executive pay packets during the cost-of-living crisis, in order to curb inflation and maintain employee productivity.
The Investment Association (IA) has written to the remuneration committee chairs at all FTSE listed companies to highlight what investors will be focusing on when considering pay practices in 2023.
While they have in the past considerered that salary increases for executive directors should be limited to inflation or the salary increase given to employees, the letter says that additional restraint should be shown while inflation remains high in order to tackle rising costs, echoing a similar pay restraint plea from the governor of the Bank of England earlier this year.
The letter says: “The current inflationary impact is disproportionately affecting lower-paid workers, where a greater proportion of their income will be spent on energy or food, which is seeing the greatest levels of inflation. The leveraged nature of executive remuneration packages should also be considered; inflationary salary increases will have a greater impact on the overall remuneration package and quantum, which may not be appropriate in the current circumstances.”
Executive pay rises in 2022
It says that boards need to balance the need to incentivise executives and employees, suggesting that bumper executive pay packets could demotivate the workforce.
Andrew Ninian, director for stewardship and corporate governance at the IA, said: “While we know from our discussions with companies that many are targeting salary increases to lower paid employees, it is imperative that all companies carefully consider how they award pay to promote the long-term success of the business.”
Research from PwC has found the average total pay for FTSE 100 CEOs rose to £3.9m in 2021-22, while record bonuses were paid out.
If executive pay rises are needed, investors urged committees to consider offers below the rate of salary increase given to all employees. Any increase should be carefully explained in order to receive shareholder approval, the IA’s letter says.
Investors welcomed the restraint displayed by remuneration committees during the Covid-19 pandemic, with the letter noting that similar measures would be welcomed during the cost-of-living crisis.
ESG-linked metrics in executive remuneration structures are increasingly being looked at by investors, it adds.
“This is particularly the case where companies have made net-zero commitments or within those sectors where ESG risks are material,” it says. “Investor expectations have similarly increased, and there are now several IA members that expect all companies to incorporate material ESG risks and opportunities into executive remuneration structures, whilst others emphasise the need for companies to only incorporate ESG metrics where they are material, linked to the business strategy, and can be simply measured and disclosed.”
The IA has published new principles of remuneration to advise remuneration committees on what investors are looking for.