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Fidelity International has warned UK company chairs against approving excessive pay packets as part of a broader crackdown on corporate governance standards.
The asset manager, which oversees more than $1tn, has sent a letter to companies in which it invests, calling for “renewed discipline” on executive remuneration and performance, and “stronger” dialogue with boards on how they allocate their capital and make acquisitions.
The letter, seen by the Financial Times, said that although boards need the “flexibility” to design competitive pay packets, “over the past year we have become concerned that the pay-for-performance principle is starting to take a back seat relative to other considerations”.
Fidelity noted that “we continue to believe that the best incentive structures for executive directors will generally provide a strong link to financial performance”, and that there have been examples of companies proposing to “de-risk management incentives following a run of poor performance” and cases of awards based on low hurdles that have not been “stretching”.
The pay packages of chief executives at the UK’s biggest-listed companies grew faster in the last financial year than those of US rivals. Median pay at FTSE 100 companies increased 11 per cent to $6.5mn, compared with a 7.5 per cent increase for US chief executives, according to data from Institutional Shareholder Services, a proxy adviser. Still, the US median pay figure of $16mn dwarfs that of the UK.
The Investment Association trade body amended its guidelines last year to give greater flexibility to companies to award top executives higher salaries, despite a series of shareholder protests against bumper pay packets.
The IA said at the time that it had “simplified” its remuneration guidelines so that companies could set pay policies to “suit their specific needs” while also “being responsive to shareholder expectations”.
Fidelity’s refreshed governance expectations also follow sweeping changes to UK listing rules that were aimed at making it easier for companies to float and list on the London Stock Exchange. The changes handed more power to company bosses to make decisions without shareholder votes, such as in relation to significant transactions.
The LSE’s chief executive Dame Julia Hoggett said last month that boards had been more “forceful” about rewarding executives as a way to attract top talent.
Fidelity said in its letter that the listing changes meant “shareholders of UK companies now face a more challenging environment for managing risk through active stewardship,” noting that the new regime removed or reduced “some of the touchpoints that previously existed between shareholders and boards” on matters such as mergers and acquisitions.
The asset manager will also ask boards to “clearly articulate their capital allocation strategies in their public disclosures” and say that it expects them to “have a robust approach to evaluating” deals, and to be “appropriately prepared for potential takeover approaches”.
On capital raisings, Fidelity said it would “remind boards to remain mindful of potential negative impacts to existing shareholders” from diluting their holdings.
Fidelity said it would also “hold boards accountable when they fail to uphold their duty to shareholders or when we believe they are responsible for significant negative outcomes for our clients”.