The National Association of Pension Funds (NAPF) has told the FTSE 350 that shareholders will not “tolerate unjustified executive rewards in the upcoming voting season”.

In a letter to the chairmen of FTSE 350 businesses today, the NAPF warned companies that have failed to establish a strong link between executive rewards and performance should expect shareholders to oppose remuneration polices as they did in the spring of 2012.

The letter, signed by the association’s chief executive Joanne Segars, stated: “2012 saw shareholder concern about executive reward come to the surface with the significant opposition to remuneration polices at a number of larger companies. We expect a similar outcome at annual general meetings in 2013 for those companies whose remuneration practices are seen as poorly aligned with the interests of shareholders. Similarly, it can be expected that where there is continued poor practice, directors who bear responsibility for remuneration policy are likely to meet opposition to their re-election.

“For the 2013 voting ‘season’ the NAPF, on behalf of its 1,300 pension fund managers, seeks a more robust link between executive rewards and company performance. In our view, too many companies have allowed that link to weaken in recent years.”

The NAPF also criticised the use of peer group benchmarking – where pay is set by comparing it to the pay of other executives from different companies.

It said it would “push back on the use of peer group benchmarking”, as it believes that benchmarking has contributed to the escalation of boardroom pay.

It stated: “Boards should focus more on their own strategies and less on comparing themselves against their peers.”

The letter also outlined the NAPF’s corporate governance policy’s best practice principles, including that: base pay increases should be capped at inflation and be in line with the rest of the workforce; the performance conditions attached to variable pay should be genuinely stretching and support the long-term growth of the business; remuneration committees should be prepared to use discretion when finalising bonus payments and share award vesting to ensure rewards are aligned with the success of the business and that returns on capital are taken into account.

The NAPF’s letter follows a call it made last month together with Hermes Equity Ownership Services, BT Pension Scheme, RPMI Railpen and USS Investment Management, for a major rethink of executive pay in order to bring remuneration packages in line with long-term business performance.

They detailed their recommendations on executive remuneration in a discussion paper available here.

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