The NAPF has this week written to the FTSE 350 making clear that pension fund investors are seeking a more robust link between executive rewards and company performance. The letter warns companies that have failed to create a strong link between executive rewards and performance that they should expect shareholders to repeat their concerns of spring 2012 and where there is continued poor practice; directors who bear responsibility for remuneration policy are likely to meet opposition to their re-election.

In the letter the NAPF set out a number of key points it expects to see reflected in pay policies in 2013. These include capping executive base pay increases at inflation and keeping them in line with the rest of the workforce - where this is not the case, companies should offer a sound explanation.

The NAPF also criticises the use of peer group benchmarking, where pay is set by comparing it to that of other executives from different companies. The NAPF believes this practice has contributed to the escalation of boardroom pay and boards should instead focus more on their own strategies and less on comparing themselves against their peers.

The rules on executive pay are set to change with the introduction of a binding vote later this year. It is important that companies and their institutional shareholders work closely together to ensure the new rules lead to higher standards.

The NAPF, with Hermes EOS and some of its largest members, recently published a discussion paper arguing for a rethink on the structure of executive pay. We will be hosting discussions between company Chairmen and pension fund investors over the coming weeks to to refine this document so that it offers an authoritative guide on companies’ pay practices and helps shareholders to assess them.

Download letter