By Mark Kleinman, City Editor
Public companies which fail to explain the performance measures behind bonus targets for top executives will risk the biggest investor in London's stock market voting against their pay policies, it has warned.
The edict was contained in a letter sent by corporate governance chiefs at Legal & General Investment Management (LGIM), which owns roughly 3% of the FTSE-100 index, giving it a powerful voice in corporate boardrooms.
LGIM wrote to the chairs of the remuneration committees of all FTSE-100 companies late last month as a prelude to the introduction of new rules that will involve giving investors a binding vote on future pay policies.
According to the letter, a copy of which has been leaked to Sky News, LGIM wants blue-chip companies to go further in demonstrating restraint following a period in which dozens of major corporate names have suffered embarrassing revolts over lavish executive payouts.
The series of rows prompted Vince Cable, the Business Secretary, to pave the way for a toughened new pay regime that comes into force on October 1, which includes binding votes for company investors.
LGIM's letter said that companies should not attempt to hide behind "commercial sensitivity" as a reason for failing to disclose granular details about performance targets, the investor said.
"Where companies believe that there is a genuine reason why some of these historic targets may continue to be commercially sensitive, we would require a full explanation as to why it is considered sensitive and for how long it will remain so.
"LGIM will consider a vote against a company that considers all of their performance measures to be commercially sensitive for an indefinite period."
LGIM said new chief executives of Britain's biggest public companies should be obliged to put their own money at risk by acquiring shares in their businesses.
Owned by the insurance group Legal & General, LGIM also said that companies should refrain from making significant 'golden hello' payments.
Citing recent examples at Bellway, the housebuilder, and Diageo, the drinks company, boards should phase in pay rises for newly-promoted directors over two years to take account of experience in the new role.
"When recruiting an external candidate, companies should take into consideration the experience of the individual and not just at the incumbent's salary. The present circumstances of the company should also be taken into consideration," the letter said.
LGIM also questioned the value of clawback provisions as a tool for reclaiming the pay of executives subsequently shown to have presided over periods of poor corporate performance.
"This has been widely adopted but the actual practice of exercising clawback can be difficult and costly.
"We would, therefore, like you to consider introducing malus [an alternative means of withholding pay], which is easier to apply and allows the remuneration committee to apply judgement to reduce outstanding and/or deferred awards."
The chairman of one FTSE-100 remuneration committee called LGIM's letter "a valuable contribution" to the pay debate and said it would help to frame remuneration policy more appropriately in UK boardrooms.
The City investor's decision to write to all FTSE-100 companies is a relatively unusual step for LGIM and illustrates the greater engagement on pay and governance issues being demonstrated by fund managers.
LGIM said it was "a long-term supportive shareholder", pointing out that it had opposed some of the more Draconian proposals originally considered by the Government, such as requiring exit payments to be subject to binding votes or having company employees on remuneration committees.
LGIM voted against scores of remuneration reports during the so-called 'shareholder spring' of 2012, which was one of the factors attributed to greater compromise from listed companies - and fewer revolts - this year.
The investor declined to comment further on the letter.
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