Activist investor TCI tells VW to overhaul board pay, operations

(Repeats to more subscribers)

* Chris Hohn writes letter to board members of firm

* Says pay structure not fit for purpose

* Wants shareholders to approve pay plans every year

By Simon Jessop and Maiya Keidan

LONDON, May 6 (Reuters) - Activist investor TCI upped the pressure on loss-making German carmaker Volkswagen (Xetra: 766400 - news) (VW) on Friday, demanding it overhaul its "excessive" executive pay scheme as part of a plan to boost profits and end years of "mismanagement".

Beset by a diesel emissions cheating scandal and fresh from posting a record loss of 1.6 billion euros ($1.8 billion) for 2015, investors have been riled by news Volkswagen (LSE: 0P6N.L - news) 's top bosses would get millions of euros in bonus payments.

In a letter to the executive and supervisory boards, seen by Reuters, Chris Hohn, founder of the $10 billion London-based hedge fund TCI, said paying such large rewards when the company performs poorly was exacerbating its problems.

"This extravagance must end. The management remuneration system needs to change. It (Other OTC: ITGL - news) is currently not fit for purpose," Hohn wrote, citing weak oversight from the firms' controlling Porsche and Piech families.

Despite setting aside $18 billion to cover legal and compensation costs from the emissions fraud, Volkswagen said on April 28 it planned to pay the 12 current and former members of its management board 63 million euros ($72 million) for 2015.

Hohn, who says TCI has a 2 percent exposure to VW stock, said his four-plus years as a shareholder had been marred by constant disappointment with both the share price and management.

He said the company has the potential for "massive" profit and cashflow growth but needs to overhaul its entire remuneration structure to ensure pay is tied to performance, more transparent and aligned with investors.

TCI is proposing that a new remuneration system be submitted to shareholders for approval every year and is looking for the company to provide full details at an investor day later in the year.

Hohn cited examples of mismanagement including a sharp rise in the firm's wage and broader cost bill that had not been matched by an increase in productivity, which was half that of rival Toyota.

The firm made 11.3 billion euros in operating profit in 2011 and is on course to make the same in 2016, despite buying Porsche and adding more than 3 billion euros of earnings before interest and tax during that period, Hohn wrote.

"Shockingly, in that six-year period, the nine members of the Board of management will have been paid around 400 million euros. That is corporate excess on an epic scale. Management has been rewarded for failure," he said.

VW declined comment when contacted by Reuters.

($1 = 0.8754 euros) (Reporting by Simon Jessop, Maiya Keidan and Ed Taylor; Editing by Elaine Hardcastle)