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Investment Ideas

Investors demand firms justify executive pay

Institutional investors are stepping up pressure on companies to take account of the “wider social context” when they award big increases in executive pay and annual bonuses.

The Investment Association, which represents the big fund managers, said in an open letter to FTSE 350 companies that its members were concerned that incremental bonus rises and automatic salary increases were leading to “a substantial increase to overall remuneration” for bosses.

“It is essential that companies adequately justify to investors the level of remuneration paid to executives, and take into account the wider social context of executive pay, rather than looking at benchmarking alone. In the coming year investors will be looking closely at how any increases are justified,” Andrew Ninian, the association’s head of stewardship and governance, wrote.

His comments come against the backdrop of a prolonged pay squeeze for ordinary workers, caused by subdued wage increases and rising inflation. The latest official figures show that average weekly earnings for employees fell in real terms by 0.3 per cent over the three months to August.

Mr Ninian said that companies should disclose the pay ratio between the chief executive and the median or average employee, as well as between the boss and the executive team. The government will require companies to do this on a voluntary basis next year but Mr Ninian said that companies should act now.

Remuneration committee heads should also do a better job of disclosing the business targets associated with annual bonus payments and explaining “the extent to which the relevant targets were actually met”.

“Companies need to do a better job at explaining why they are paying executives what they are,” Mr Ninian said. Where a bonus was potentially worth more than 100 per cent of a boss’s salary, a portion of it should be deferred into shares, he added.

Mr Ninian, whose members manage £6.9 trillion of assets, also said that lavish company relocation packages should be disclosed immediately and paid for a limited period only. This reflects growing investor concern that overly generous moving packages provide an “ongoing benefit” rather than one-off compensation to bosses forced to move for their job.

The association’s letter acknowledged the debate over the use of long-term incentive plans, or LTIPs, which typically supplement base salaries with performance shares or matching shares of the company. MPs on the business, energy and industrial strategy committee have called for LTIPs to be phased out, blaming them for fuelling executive pay inflation.

While Mr Ninian stopped short of endorsing the committee’s view, he noted in his letter that many of the Investment Association’s members supported the idea of replacing LTIPs with restricted share plans that did not have future performance conditions attached, as a way of reducing overall pay.

The association has written to more than 100 London-listed companies, including AstraZeneca and Pearson, that will appear on a new public register naming and shaming companies whose resolutions were opposed by at least 20 per cent of shareholders at this year’s annual general meeting. Mr Ninian said he had invited companies to submit an explanation of how they have responded to the vote so this could be included on the register, which will be published before the end of the year.

Africa’s biggest bank to buy British for £1bn
The chief executive of Aldermore is expected to collect about £10.6 million after the specialist lender and savings bank recommended a £1.1 billion, 313p-a-share offer from First Rand (Martin Strydom writes).

Phillip Monks has 3.4 million shares in the smaller British bank and is expected to sell as a result of the deal. Mr Monks and other senior executives are expected to stay with the bank, which has more than 230,000 customers.

The offer is about a 22 per cent premium to the 256p closing price on the day before it was announced. Yesterday Aldermore rose by more than 3 per cent, closing 9½p higher at 312p.

Mr Monks said the backing of First Rand, Africa’s biggest bank by market capitalisation, would allow Aldermore, founded in 2009 by the private equity firm Ana Cap and floated in 2015, to expand its products and services.

A third-quarter interim management statement showed new loans rose by 12 per cent to £8.4 billion in the quarter from £7.5 billion at the end of last year. Growth was driven by £2.4 billion of new lending. Customer deposits rose 8 per cent to £7.2 billion.