City Chiefs: Exec Pay 'Not Fit For Purpose'

A group of top City executives has slammed boardroom pay practices as "broken" and "not fit for purpose", demanding an urgent overhaul to restore public confidence in British business.

Sky News has learnt that a panel set up to explore ways of simplifying executive remuneration will publish on Thursday a series of proposals aimed at increasing transparency and directors' accountability.

In their interim report, the committee will urge companies to move away from the "median comparators" used by directors to justify paying ever-higher packages to top executives through what it labels "remuneration creep".

The group's conclusions will emerge during the most fraught environment for executive pay for years, with BP and Smith & Nephew (LSE: SN.L - news) both suffering humiliating investor rebellions at their AGMs last week.

Nearly 60% of BP shareholders voted against its pay report after Bob Dudley, its chief executive, was paid almost £14m for his work in a year when the oil giant lost more than £3bn.

Further revolts are expected in the coming weeks - including at the FTSE 100 miner Anglo American (LSE: AAL.L - news) on Thursday - amid growing applause from leading politicians including the Chancellor, George Osborne.

Established last September under the auspices of the Investment Association, which counts as members fund managers managing more than £5.5trn of assets, the working group's members include David Tyler, the chairman of Sainsbury (Amsterdam: SJ6.AS - news) 's, and Nigel Wilson, chief executive of Legal & General (LSE: LGEN.L - news) .

City sources said on Wednesday that the committee's initial conclusions were that the near-universal application of a three-year long-term incentive plan (LTIP) pay model was too prescriptive and is inappropriate to many public companies.

The group is evaluating a number of alternatives to the conventional LTIP structure, including deferring bonuses into shares which vest over a lengthy period and replace LTIPs altogether; granting of shares based on performance over the previous three years, which would guarantee the final sum to be paid out; and awarding restricted shares that would not be dependent upon long-term performance.

Insiders said the group would conclude that greater certainty over future payouts from these alternative structures meant that a discount of as much as 50% would need to be applied to current LTIP award levels.

One said that, if implemented, such a discount rate would be "the most significant evolution of boardroom pay for decades".

The interim report will also address issues such as reward for failure, and is expected to say that a form of clawback could be used to prevent excessive payments being made to departing executives "in the event a threshold level of performance is not reached".

Board executives should hold shares in their companies equivalent to five times their basic salary, according to the committee, while - in an implicit allusion to last week's revolt at BP - it will argue that remuneration committees will need to explain more clearly "the overall division of profits between executives, the wider workforce, shareholders, and retained profit for reinvestment in the business".

Sources said the working group would consult widely on its findings before publishing final proposals later in the year.

"The FTSE-100 is trading at broadly the same levels as 18 years ago and 10% below its peak - however, executive pay over the same period has more than trebled and there is an increasing disparity between average wages and executive wages," the report is understood to say.

"This misalignment has resulted in widespread scepticism and loss of public confidence.

"Failure has sometimes been rewarded and use of median comparators has driven disproportionate rises in executive remuneration. This is ultimately damaging to the listed company sector."

The group has also concluded that the complexity of executive pay structures has resulted in undue amounts of time being spent justifying those schemes during discussions with company shareholders, meaning that broader strategic issues are frequently marginalised.

None of its members could be reached for comment on Wednesday.