MPs to probe FTSE chiefs' pay as top City investor demands reform

Blue-chip bosses will be served fresh notice on Friday of pressure to overhaul the way they are paid when a powerful group of MPs (BSE: MPSLTD.BO - news) launches a wide-ranging inquiry into corporate governance and executive remuneration.

Sky News has learnt that the Business, Innovation and Skills (BIS) Select Committee will announce on Friday that it is to probe boardroom pay following a string of revolts this year by investors in companies such as BP and Smith & Nephew (Frankfurt: 502816 - news) .

The MPs will publish the terms of reference of their inquiry on the same day that the City's biggest institutional shareholder - Legal & General Investment Management (LGIM) - outlines its determination to secure sweeping changes in boardroom behaviour.

Sources said that LGIM wrote to all FTSE-350 chairs several days ago to highlight a series of changes to pay practices that it wants to see adopted in the coming months.

They include a recommendation that remuneration committee chairs should have served on boards for at least a year prior to their appointment to the role; considering re-tendering remuneration consultancy contracts if more than 20% of investors oppose pay reports; and publishing the "pay ratio between the CEO's total single figure and the median employee", according to a copy of the guidelines seen by Sky News.

LGIM, which will publish its revised principles on Friday, also told companies for the first time that it wanted to see boards demonstrate restraint on executive pay inflation by "not consider[ing] increases to individual elements of remuneration in isolation".

"We would encourage the reduction of short-term annual bonus levels [with] 200% of salary reserved for the largest global companies," it said.

The developments come after Theresa May instructed Whitehall officials to start paving the way for an overhaul of blue-chip companies' governance, with new proposals expected to be published later in the autumn.

The Prime Minister has signalled her desire to see annual binding votes on pay packages, as well as employee and consumer representatives on boards amid disquiet over the management of companies such as Sports Direct International (Other OTC: SDIPF - news) .

LGIM's demands for boards to begin disclosing pay ratios is not altogether surprising, since the same recommendation was made in a recent report sponsored by the Investment Association and chaired by Nigel Wilson, the chief executive of Legal & General Group.

However, the broader updates to its pay principles will underline the growing belief that institutional investors are keen to see sweeping changes following a number of humiliating showdowns at this year's AGMs.

Westminster insiders said on Thursday that the BIS committee's inquiry would consider a number of questions, including an examination of why executive pay has risen so steeply over the last 30 years relative to that of more junior employees.

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.

Earlier this 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, held talks about his proposals last week with Downing Street officials.

The MPs' inquiry being launched on Friday will also examine how executive pay should take account of companies' long-term performance, whether new measures are required to enable Government to control remuneration, and whether investors should play a greater role.

Iain Wright, the committee chair, spent part of its joint inquiry into the demise of BHS attempting to quiz former owners and executives about governance standards at the collapsed retailer.

A spokesman for the BIS committee declined to comment.