The UK’s largest listed companies have been warned against using “boilerplate” arguments to justify big executive pay increases by an influential group of shareholders.
The Investment Association (IA) – whose members manage £10tn of assets – has told pay committees to avoid “benchmarking”: where companies argue higher pay is needed in order to match rivals and avoid bosses jumping ship for larger salaries and bonuses elsewhere.
The IA – whose members include Schroders, Legal & General and Aviva – used its annual letter to London-listed companies to say that the “use of benchmarking on its own to justify increases in remuneration is not appropriate, as it can lead to a ratchet effect in the market”.
It stopped short of naming any individual company but said it expected “well-substantiated” rationales for pay rises from remuneration committees.
“To date, members have observed that some rationale disclosures have not met this expectation, with remuneration committees using boilerplate and generic justifications, often citing ‘competitiveness against peers’ or the need to ‘attract and retain talent’ without any further supporting information,” the letter said.
“Where benchmarking suggests a large increase in pay purely to ‘catch up’ to a market percentile, remuneration committees should assess whether that is genuinely in shareholders’ interests and be prepared to explain reasoning beyond “market practice.”
The IA added that – as the biggest 350 listed companies prepare their annual reports in the run-up to the spring shareholder meeting season – the most important factor was that they demonstrate a “strong link between pay and performance”.
It comes despite a campaign to raise executive pay across the UK, with City firms such as the London Stock Exchange claiming it is harming competitiveness and curbing London listings.
The stock exchange chief executive, Julia Hoggett, said last week that UK companies had become more “forceful” about rewarding top executives to compete with international rivals.
“We are talking about being able to attract and make sure we can win in the war for talent so that our companies can have the best leadership to drive the best shareholder value,” she told the Financial Times’s Future of Asset Management Europe conference.
Hoggett’s boss, the London Stock Exchange Group CEO, David Schwimmer, saw his own pay jump to £7.9m in 2024 from £5.4m a year earlier. It came after investors approved an increase in his maximum pay levels from £6.25m to more than £13m, meaning he could take home that sum if he hit all the group’s internal targets.
Median pay for FTSE 100 chief executives jumped 11% to £6.5m last year, faster than the 7.5% rise for US bosses, where median pay is already much higher at $16m, according to data from the proxy adviser Institutional Shareholder Services.
Andrew Speke, the interim director of the High Pay Centre thinktank, said the IA’s warning over benchmarking was “very welcome”.
He said: “The value a CEO actually creates for their company, and how their pay aligns with the rest of the workforce, should be far more critical factors in determining how much they are paid.”
However, Speke said the IA’s warning would have limited impact. “Benchmarking is so deeply embedded across the FTSE 350 that the guidance may change how remuneration committees describe executive pay increases, without necessarily ending benchmarking in practice.”
While investors’ willingness to challenge pay awards has strengthened in recent years, the thresholds for voting down pay packages and policies remain high. “Ultimately, because these votes are advisory, remuneration committees still have too much power to push ahead with unpopular pay policies regardless of investor concerns,” Speke said.
“Strengthening investors’ ability to actually block inappropriate pay practices remains crucial if we want to see meaningful change.”
