Institutional investors are toughening up their stance against remuneration packages and will demand enhanced disclosure of pay metrics and a closer alignment between pay and performance, a new survey has revealed.
The Institutional Investor Study 2018, conducted by corporate governance experts Morrow Sodali, found that 88 per cent of investors view pay for performance as the most important issue in executive remuneration, up 13 percentage points from last year. A further ten per cent view it as 'important'.
This finding comes in the wake of shareholder anger that Jeff Fairburn, chief executive of Persimmon, received a £110 million bonus after the FTSE 100 housebuilder achieved certain performance targets. A group of City shareholders have reportedly warned the company that the record breaking payout is unsustainable, and demanded Fairburn returns at least 90 per cent. (He has declined, instead donating funds to charity.)
Almost half - 46 per cent - of respondents view 'rigour of performance targets set under incentive schemes' as most important, while 42 per cent view this issue as 'important'.
The survey revealed that investors increasingly expect remuneration committees to create the appropriate remuneration structures for their businesses, and that they clearly link pay to its long-term success. Almost three in four (73 per cent) believe better disclosure on the metrics and criteria that form the basis for pay decisions is 'very important', with 83 per cent requiring a detailed explanation of how compensation decisions link to long-term strategy and goals. They are also increasingly keen to receive information on the backgrounds of board members, their qualifications and the value that they bring to the boardroom.
The survey also found that investors are more focused on the skill set of a company's board than on diversity. Just seven per cent said that gender was the most important diversity criteria, eight per cent mentioned ethnicity but 71 per cent cited skills. 'While gender, ethnicity and age diversity are of course important, they should not in any way distract boards from recruiting directors who have the right skills and experience for the roles,' said the report.