City Investors Fire New Warning Shot Over Pay

The directors who set pay at Britain's biggest companies are being warned against approving annual salary rises for chief executives as investors intensify pressure on boards to rein in inflation-busting increases.

In a letter sent this week to the remuneration committee chairs of FTSE-350 companies - a copy of which has been seen by Sky News - the Investment Association (IA (KOSDAQ: 038880.KQ - news) ) said it would issue 'red-top' alerts on the pay votes of businesses which fail to provide sufficient disclosure about bonus targets.

The warning underlines the continuing friction between the managers of trillions of pounds of assets and the UK's largest listed companies despite wide-ranging reforms introduced by the last Business Secretary, Sir Vince Cable.

Andrew Ninian, the IA's director of corporate governance and engagement, said in the letter that its members, who control more than £5tn in assets, "continue to be concerned by the level and frequency of salary increases".

"Shareholders have...a clear expectation that in normal circumstances, basic salary increases should be limited to inflation or the increase being given to the general workforce.

"In fact, there are a growing number of investors who consider that executive directors should not receive regular salary increases, given the overall structure of their remuneration packages."

The latest warning shot from the IA comes at a turbulent time for the organisation, which lost its chief executive last month after a dispute with a number of its most influential members.

In addition to the warning about pay rises, Mr Ninian also told pay committee chiefs that IA members now expected all long-term incentive awards to have a holding period of at least five years, against a previous assumption that such awards would be retained for three years.

He added that the disclosure of bonus targets had improved, but warned that "there are still a number of companies that provide no details on their bonus targets or consider them to be commercially sensitive with little justification".

"Members now expect that targets will either be disclosed retrospectively in full at the end of the year, or that there is a commitment to disclose such targets... [Where this does not happen], members have asked IVIS to Red Top those companies as they believe that there is insufficient information to make an informed voting decision."

The IA's threat paves the way for a deluge of further revolts over pay next year, since many investors follow the red-top advice given by the IVIS voting advisory service.

A further area of concern, Mr Ninian wrote, related to the length of service contracts, and he urged companies to insert clauses allowing them to withhold pay in lieu of notice while a disciplinary or misconduct investigation is ongoing.

The IA's agenda comes as a separate working group on executive pay works on proposals aimed at reforming Britain’s boardroom reward culture.

The panel, which includes the bosses of Legal & General (LSE: LGEN.L - news) and Sainsbury (Amsterdam: SJ6.AS - news) 's and Boris Johnson's top pensions adviser, is examining whether long-term share awards should be scrapped altogether.

Its establishment follows the 'Shareholder Spring' of 2012, which resulted in the ousting of chief executives of companies including Aviva (Other OTC: AIVAF - news) and Trinity Mirror (LSE: TNI.L - news) following investor revolts over their pay packages.

The string of rebellions prompted Vince Cable, the then business secretary, to introduce binding votes on companies' pay policies, although votes on the previous year's remuneration reports remain advisory.

However, the reforms have not curbed the flow of shareholder anger over boardroom pay, with companies such as AstraZeneca (NYSE: AZN - news) , BG Group (LSE: BG.L - news) , Man Group (LSE: EMG.L - news) and RSA all suffering substantial rebellions at their annual meetings this year.