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‘Spiralling pay levels’ worry ABI

In new guidance, investor body says bonuses shouldn’t be paid at all if a company suffers an ‘exceptionally negative event’

Boardroom bosses are being warned of shareholder concern about the ever-increasing size of their pay packets in an influential new code that requires bonuses to be “clawed back” in the event that performance targets are not met.

In the first update for five years of its guidelines on pay, the Association of British Insurers spells out anxiety about pay deals handed out just to enable executives to keep up with their peers. It says bonuses should not be paid at all if the company suffers “an exceptional negative event” even if other performance targets are met.

The so-called guidance on remuneration – first published in the 1970s – requires companies to spell out why directors are being handed extra pay. “The constant chasing of perceived median has been a major contributor to the spiralling levels of pay,” the ABI guidance said.

For first time it highlights the “quantum” of pay for directors and requires overall pay for boardroom bosses to be considered in the context of overall pay deals outside the highest echelons of the company. The department for business, innovation and skills (BIS) is consulting on potential new rules and recently published data showing that the median total remuneration of FTSE 100 chief executives rose from £1m to £4.2m over 12 years.

The ABI, though, does not go as far as Vince Cable, who in the consultation asks whether a ratio of chief executive pay to the rest of the workforce should be published. In addition, the effectiveness of its code will only become apparent if its members – shareholders controlling a fifth of the stock market – vote against remuneration policies.

Even so, a BIS spokesman backed the ideas. “The key principles in the ABI’s guidance match what we have found in our conversations with shareholders, investors and business leaders so far – that excellent performance should be rewarded, but that there is a strong need to end ‘reward for failure’,” he said.

The ABI will also publish a report of “boardroom effectiveness” in response to the Lord Davies review . It argues against quotas for women on boards but agrees that diversity around the boardroom table and good succession planning is crucial for big companies. The ABI calls for disclosure on diversity to improve as just 19% of the companies in the FTSE 100 have set out their policy on diversity and pledged to convene discussions with companies over how boardrooms are able to measure their overall performance.

The ABI is publishing its updated guidelines on pay at a time when companies traditionally begin to discuss new pay deals with shareholders. WPP, for instance, has sounded out investors about a 50% pay rise for its chief executive Sir Martin Sorrell , to take his salary to £1.5m.

The reference to “an exceptional negative event” being a reason not to pay out bonuses comes as all the big banks take multi-million hits to their profits as a result of compensation for payment protection insurance mis-selling. Lloyds banking group has said it is looking at bonuses awarded before its £3.2bn provision, which could impact the £1.45m awarded to former chief executive Eric Daniels.

The ABI also says that “payment for failure cannot be tolerated” and asks that “clawback” and “malus” (penalty) provisions are inserted into new long-term performance plans to “prevent executives receiving rewards that are undeserved”.

The new code is less prescriptive than in the past and gives companies overall guidance on pay, while allowing them discretion.

Sean O’Hare, partner in PwC’s remuneration practice, said: “The ABI has revised its guidance into a set of principles, with less prescription on what companies should be doing. This is good news – indeed, the report states it is not the role of shareholders to micro-manage companies, a point that is often lost in discussions around executive pay.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds