Top investors give green light to bigger FTSE pay packages

Institutional investors in Britain's biggest public companies are to pave the way for bigger boardroom pay packages amid arguments from corporate chiefs that "restraint" over remuneration is causing irreversible damage to London's stock market.

Sky News has obtained the draft of a letter from the Investment Association, whose members collectively manage £8.8trn in assets, to the chairs of FTSE 350 remuneration committees in which it signals a significant change in its stance towards bosses' pay.

In the letter, which is expected to be released publicly within days, the IA says it intends to conduct a "fundamental review of the Principles of Remuneration [later this year] ... reflecting the evolving member expectations on remuneration and feedback from companies".

The IA said it acknowledged feedback from companies - particularly the largest in the FTSE 100 - that they were finding it increasingly challenging to "attract US executives and compete in the US market" because of the gulf between pay deals for bosses working for London and New York-listed businesses.

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The letter also highlights a growing desire from British companies to introduce so-called hybrid incentive schemes comprising both restricted stock and long-term share awards.

"These global companies are able to use such schemes in the US and other jurisdictions and feel such structures should be used for their executives," the draft letter says.

The investor body flagged concerns raised by companies that the range of measures - such as malus, clawback and post-employment shareholding requirements - designed to prevent high pay packages being awarded without appropriate long-term evidence of strong financial performance may have gone too far.

"Individually, they are accepted as a means to increase the long-term alignment of executives and shareholders but in aggregate there may be a view that the perceived impact on the value of remuneration received is disproportionate," it said.

The letter come amid growing fears for the future of the London stock market following the release of data showing that the declining number of companies listed in the UK has accelerated in recent years, and amid visible signs that the City is losing ground to its biggest global rival.

This week, Flutter Entertainment, the owner of Paddy Power and Betfair, confirmed that it intended to shift its primary listing to the US, while a growing number of companies have said they plan to float in New York rather than London.

Julia Hoggett, the London Stock Exchange chief executive, argued last year that lower executive pay was hampering the ability of British companies to draw "global talent" to their ranks.

The IA added: "In light of the feedback we received from companies and the evolving views of our members on quantum and hybrid schemes, we will be updating the Principles of Remuneration in 2024 to simplify them, ensure that they are supporting a competitive market and delivering the right outcomes for both shareholders and their underlying clients.

"We will ensure that current market practice and expectations of our members lead to the evolution of the principles, rather than the principles dictating market practice."

In recent months, a number of prominent public company bosses - including the former chief executives of Barclays, BP and NatWest - have seen tens of millions of pounds of pay awards cancelled and clawed back owing to revelations of misconduct.

The latest intervention from the IA will therefore mark a decisive shift from its stance in recent years, which has sought to hold boardroom pay chiefs to account over perceptions of excess in boardroom pay practices.

In 2017, the trade body introduced a public register to draw attention to any public company receiving significant opposition to boardroom pay packages in an attempt to put the brakes on inflated awards.

It also fought to curb windfall gains for executives after the COVID pandemic triggered a plunge in many companies' share prices, handing them bumper stock awards several years later.

The IA drew praise for successfully exerting pressure on boards over pension contributions for senior executives which exceed those made to the bulk of their workforces.

Its revamped approach to executive pay has the potential to prove controversial given ongoing concerns about the cost of living and the perspective of campaigners against multimillion-pound corporate pay packages.

It was unclear on Tuesday what the implications of the IA's letter to pay committee chiefs would be for the voting recommendations of the IVIS proxy service it oversees, which has proved to be influential among institutional investors for years.

An IA spokesperson said: "We want to see a competitive listing environment that attracts companies to list in the UK.

"As such, we are currently consulting with our members on their current views on executive remuneration at investee companies, with an underlying principle that there is clear alignment between pay and performance, and to ensure that remuneration structures work for companies, executives, and shareholders.

"Once this consultation process has completed, we will look to publish our members' views."