The UK’s largest asset management organisation has updated its executive pay guidelines to say that it will permit US-style bonus structures linked to a company’s share price performance – a move that could lead to huge payouts for executives.
Legal & General Investment Management (LGIM) has published new UK executive pay principles that state it will support the introduction of incentive schemes linked to share price performance over a set period of time under certain circumstances, but it said it ultimately preferred “simple” remuneration packages.
It noted that there had been an increased push towards remuneration structures that are more closely aligned to US-style pay, particularly among UK companies with executives operating in the US, or those competing for talent in that market.
However, it said that multiple incentive schemes can “remove the clear line of sight provided by a single performance-based share award”, which suggests that it discouraged these types of schemes.
It said it may only support time-based restricted share schemes where the company has provided acceptable justification on how this pay structure is aligned to company strategy and business cycles, and where it resulted in a commensurate reduction of existing performance-based limited-time incentive plans.
Executive pay and remuneration
LGIM also cautioned against the introduction of restricted share plans (RSPs), an incentive plan purely subject to time-based vesting criteria, stating that it did not believe it was right for all companies.
“We continue to prefer performance-based variable pay and expect a substantial majority of share schemes to comprise share incentives that require pre-set performance criteria in order to vest. We therefore expect no more than a quarter of a company’s total long-term incentives to be awarded under an RSP-style plan,” LGIM said.
The guidelines were published as the High Pay Centre revealed that the difference in median pay between chief executives in the FTSE 350 and other employees was 57:1 in 2022 – slightly wider than the previous year.
LGIM said that it wanted to support organisations to recruit, retain and incentivise talent, but it expected boards to ensure that executive pay was fair, balanced and aligned with the firm’s strategy, performance and long-term growth objectives.
The guidance says: “In our view, upper quartile total pay should only be earned for outperforming peers and meeting stretching performance targets. In determining executive remuneration practices and setting pay levels, it is ultimately the responsibility of the remuneration committee to clearly explain to their investors why its chosen pay package is fair and appropriate after considering all the circumstances.”
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