City giant Hermes breaks ground with CEO pay cap proposal

One of the City’s most prominent asset managers has dropped a bombshell into the debate on boardroom pay by proposing that Britain’s top companies cap the sums they can pay to their bosses.

Sky News has learnt that Hermes Investment Management has begun circulating a document among the chairs of FTSE-350 companies' remuneration committees which contains the landmark idea.

Sources said it was the first time that a mainstream fund manager such as Hermes had suggested that top companies impose a ceiling on overall pay, as well as the individual components of their deals.

It comes just weeks before Theresa May is expected to publish a series of proposals for reforming boardroom behaviour, including additional binding shareholder votes on executive pay packages.

The Prime Minister signalled in her speech to the Conservative Party conference her desire to see employee and consumer representatives on board, among other reforms.

Hermes, which is owned by the BT pension scheme but also manages money on behalf of external clients, is understood to have drafted its proposals in recent weeks, with a final document expected to be published within the next month.

The plan is aimed at addressing growing concerns about the remuneration of bosses such as BP's Bob Dudley, who was paid £14m for last year despite the company announcing, by one measure, its biggest-ever loss.

Under Hermes' proposal, companies would publish the figure above which a chief executive's pay would not rise, with the sum then discussed with investors.

Some bosses have seen their pay soar beyond expectations because of the rising value of bonus and long-term share awards, with the best-paid public company chief executive this year being Sir Martin Sorrell, whose package at WPP Group was worth more than £70m .

In its draft paper, Hermes attacks the UK's existing executive pay model, saying that "too often remuneration committees fail to exercise their judgement and discretion".

The asset manager said pay structures "should be much simpler and less leveraged…for example [through] higher fixed pay and a single incentive scheme" and that "pay awards should reflect the outcomes for long-term investors and not be blind to erosion in company value".

Among Hermes' other recommendations is that executives at FTSE-100 companies should hold shares worth five times their base salary - higher than the level proposed by other fund managers.

It also argues that remuneration committee chairs should "take on board" the views of company employees.

Last month, the Business, Innovation and Skills (BIS) Select Committee launched a probe of boardroom pay and broader corporate governance following a string of revolts by investors in companies such as BP and Smith & Nephew (LSE: SN.L - news) .

The City's biggest institutional shareholder - Legal & General Investment Management (LGIM) - has also signalled its determination to secure sweeping changes in boardroom behaviour, with a recommendation that remuneration committee chairs should publish the pay ratio between the CEO's total single figure and the median employee.

Campaigners against high pay have pointed to above-inflation rises for the bosses of FTSE-100 companies, with the average soaring 10% to £5.5m last year, although many public company directors argue that excessive curbs would damage the international competitiveness of UK plc.

Last month, Chris Philp, a Conservative MP, published a report in which he called for the creation of shareholder committees at all listed companies.

The new committees would have powers to approve pay policies, and assume responsibility for hiring and firing directors.

Mr Philp, who secured support from Lord Myners, the former City Minister, and top fund manager Neil Woodford, has held talks about his proposals with Downing Street officials.