Sunday 15 May 2016 8:30 pm

Why this year’s votes against exec pay are not just a knee-jerk reaction

As the world’s largest investment fund, Norway’s £590 billion oil fund is an unusually forward thinking animal. Well known in asset management circles for its stance against companies involved in the production of tobacco, nuclear weapons and most recently coal firms, the fund has announced that it will target executive pay which it deems excessive.

The announcement comes on the back of a number of exceptional votes against remuneration packages at this year’s annual general meeting season. Investors have expressed their anger at what are seen to be unreasonable levels of executive pay and out of touch remuneration packages.

While Royal London Asset Management’s voting record has remained consistent to that of previous years, there have been a number of rebellions or significant votes against executive remuneration, at BP, Anglo American and more recently Reckitt Benckiser. These are driven by a significant number of institutional investors taking a much more considered approach to the votes they cast.

The votes we are seeing this year are not just a knee-jerk reaction. The message to companies this year is that investor concern about pay is not reserved for minority activists with a bone to pick, but an issue of wider concern for mainstream investors, as well as our customers and members, who are individual pension savers with money invested in these companies.

The remuneration committees responsible for setting these levels of pay seem to be out of touch, which is a governance failure in our view. If boards fail to respond, then investors would be well-placed to start expressing their discontent by voting against the re-election of committee and board members in coming years.

In the case of Reckitt, we recognise that the company has delivered consistently strong performance. However, we have voted against the pay report for several years because the remuneration committee has consistently pushed the boundaries of what we consider to be acceptable levels of pay amongst top UK executives.

We are also concerned that the share incentives of more than 30 times salary, an earnings multiple that would make even top performing hedge fund managers blush, are assessed against just a single measure of performance, which is the company’s adjusted earnings per share.

There is no hard and fast rule for executive remuneration, especially when asking the question how much is too much? In Reckitt’s case, some of their US competitors have the potential to offer even bigger packages for company executives.

But in the United Kingdom, where the toxic view of underperforming bankers receiving excessive bonuses has never been far from the headlines since the credit crunch of 2008, sentiment in the square mile has already shifted towards a much closer alignment between performance and pay at the top of Britain’s biggest companies.

Boards and their remuneration committees would do well to listen to investor concerns.