LONDON - A burgeoning political fight over executive pay has propelled U.K. pension funds and money managers into an uncomfortable spotlight.
Now, it appears that U.K. corporations will be forced to disclose many more details on the pay packages for top executives and design incentives to better tie executives' risks to those of shareholders. Current U.K. law requires that only the pay of the chairman and highest paid director be disclosed.
The question remains, however, what institutional investors will do with the new information. While some think disclosure will provide an adequate check on excessive pay practices, more liberal elements - including the U.K.'s Labour Party - would like shareholders to vote on each pay package.
The political firestorm was ignited by reports that the chief executive of British Gas PLC, Cedric Brown, last year had received a whopping 75% increase in his salary, raising it to (pounds) 475,000. In a heated hearing before a House of Commons committee recently, Mr. Brown insisted the increase really was only 28%. The higher figure stemmed from a restructuring of his pay package.
No matter. The Labour Party already had seized on the issue of hefty pay going to top executives of newly privatized utilities while middle-rank employees faced pay cuts or loss of jobs. Nor are consumers happy about the news.
Labour's Shadow Chancellor Gordon Brown lambasted huge pay increases for top executives of recently privatized utilities, saying the hikes were unrelated to company performance. He claimed that Edmund Wallis, the chief executive of PowerGen, received nearly (pounds) 1.3 million in pay and share options last year, a 1,096% increase in total pay since the company was privatized.
Similarly, John Baker, chief executive of National Power, took in more than (pounds) 1.1 million in pay and share options last year, a 978% increase since the company was privatized, Mr. Brown claimed.
The debate later shifted to floor of the Commons, where Labour leader Tony Blair pressed Prime Minister John Major on why the government hadn't intervened, since it holds 40% of the stock of both PowerGen and National Power.
Mr. Major reportedly reiterated his opposition to excessive pay packages but said the matter was one for the market to decide.
While compensation packages among utility executives triggered the debate, the furor has spread quickly to pay packages for U.K. corporate executives as a whole.
The Confederation of British Industry has formed a new committee to develop guidelines on executive pay. But the new committee already has come in for some criticism for the high levels of pay awarded its members. The committee is chaired by Sir Richard Greenbury, chairman and chief executive of retailer Marks & Spencer PLC, London, whose pay package totals (pounds) 779,000.
The committee is expected to issue guidelines in six months calling for more detailed disclosure of executive pay. But the bulk of its work already may have been completed: The Institute of Directors almost simultaneously issued new guidelines on executive pay.
Those guidelines would require detailed disclosure and justification of salaries, awards, bonuses, stock, stock options, pensions, the length of contracts and other benefits.
The IoD said main factors board compensation committees should consider include the performance of the company and individuals, executives' level of responsibility, the degree of risk inherent in the job and competitive corporate pressures. The guidelines also recommended that pay levels be sensitive to salary and employment conditions, with comparisons made both in the United Kingdom and internationally.
The guidelines also called for closer ties between the interests of executives and shareholders. The IoD urged greater use of longer-term holdings of company stock, stock options and longer-term bonus arrangements. It also said employment contracts should be for no longer than two years.
But the IoD rejected notions that shareholders should vote on pay packages. "That would go against the basic principle that the running of a company is delegated by the shareholders to the board of directors," the guidelines stated. The IoD said shareholder votes also would be inflexible and impractical and would make it difficult to hire and retain executives.
Nor did the IoD welcome suggestions that members of the board's compensation committee be approved annually. "If shareholders are not satisfied that members of the remuneration committee, or the board, have acted in a responsible and reasonable way, their ultimate sanction is to remove them," the body said in a release.
Money managers generally agreed that they shouldn't get involved in evaluating executive pay packages. "Our role is to get a good return on the funds we manage," one money management executive said. "It doesn't merit spending a lot of time talking about things that are trivial."
Geoff Lindey, chairman of the National Association of Pension Funds' investment committee, said it would be impractical for money managers to vote on pay packages at annual meetings. What's more, it's philosophically wrong for money managers to vote, he said; that job belongs the board of directors.
Another manager added that portfolio managers are not in the position to evaluate pay packages, and rely on the independent directors and the compensation committee.
But the tide is changing swiftly. The Labour Party, which all polls show would be returned to power if elections were held now, wants shareholders to elect directly members of compensation committees. Non-board members should be eligible for such committees, said Mr. Brown. Plus, he argued that shareholders should vote annually on the pay of each board member.
The Pension Investment Research Consultants Ltd., London, which advises 20 local authority funds with about (pounds) 20 billion in assets, favors voting on pay packages. Anne Simpson, joint managing director of PIRC, questions the notion of voting out directors if their pay package is unacceptable.
"You could have a really terrific executive director with a lousy pay policy," she said.
And the (pounds) 300 million London Borough of Lambeth was expected to adopt a proposal requiring its money managers to put forward resolutions requiring detailed pay disclosure and a vote on pay packages - though some question whether a pension fund client can require a manager to bear the expense of doing so.