Five of the UK’s leading pension investors have called for a major rethink of executive pay in order to bring remuneration packages in line with long-term business performance.

Hermes Equity Ownership Services (Hermes EOS), the National Association of Pension Funds (NAPF), BT Pension Scheme, RPMI Railpen and USS Investment Management have jointly published guidance on executive remuneration.

The report is published ahead of the binding vote on future remuneration policy due next year and outlines four principles to encourage businesses to rethink their reward structures.

They urge businesses to take action in areas including: making long-term investments in shares of the businesses they manage; bringing pay schemes in line with long-term business success; ensuring pay schemes are simple and understandable for investors and executives and ensuring rewards reflect long-term returns to shareholders; and remuneration committees should justify how their decisions will deliver long-term business success.

Hermes EOS and the NAPF have said they will host a number of working seminars for remuneration committee chairs and shareowner representatives in order to discuss the four principles as well as to look at refining the report.

Hermes EOS head of UK engagement Jennifer Walmsley said: “Following meetings with FTSE100 companies and many large pension schemes from the UK and overseas, it has become clear there is a growing desire to re-evaluate current remuneration arrangements and embrace a new approach.

“Flawed remuneration schemes can create inappropriate incentives with even the best designed schemes potentially resulting in outcomes that do not match up to a deeper analysis of company performance.

“By publishing these principles we hope to encourage companies to reconsider their current remuneration arrangements to better align the interests of executives and shareholders, and ultimately enable companies to position themselves for future success.”

NAPF chief executive Joanne Segars added: “This is the next stage of a vital conversation with the business world about how it can rethink its approach to boardroom pay. We have become increasingly concerned by the complexity of many spiraling pay deals. We need to see change, and it is encouraging that many companies agree.

“Shareholders want a much simpler approach that nails boardroom pay to the long-term health of a business. Paying executives proportionally more in shares that are owned for a long time could help align pay with shareholder interests.”

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