Hermes urges rethink on executive pay

Boardroom chairs of public companies should write to employees every year explaining the level of annual pay chief executives receive, says Hermes Investment Management, a firm owned by the British Telecom pension scheme and that specialises in corporate governance.

The recommendation comes in a Hermes report that calls for radical reforms to executive remuneration models including for pay to be linked to long-term fortunes of companies and less to share price performance.

In ‘Remuneration Principles: clarifying expectations’, another key suggestion is for the ratio of CEO to median worker pay to be revealed.

High Pay Centre data cited in the report suggests the ratio of chief executive pay to that of the average worker had doubled from 70 times in 2002, to 140 times in 2015, and Hermes notes public anger with the issue.

Saker Nusseibeh, Hermes chief executive, said it was time for companies and investors to rethink the executive pay issue and align pay with the interests of long-term owners and broader society.

“The investment management industry must recognise its responsibility to engage with companies effectively as interested owners and, where necessary, use shareholder rights collectively and consistently,” Nusseibeh said.

Hans-Christoph Hirt, co-head of Hermes Equity Ownership, added that the combination of simplicity with increased certainty of outcome should result in lower average payouts, without changing the value of awards in the minds of executives. Moreover, pay packages should avoid incentivising unintended behaviour and encourage the creation of sustainable value for stakeholders.

©2016 funds europe

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