Fidelity calls for veto on executive pay

Fidelity fund managers are calling for the right to veto excessive pay packages for company executives.

The group said that reform is needed to tackle complex pay structures and allow shareholders to reign in generous bonuses for company management.

Dominic Rossi, chief investment officer of equities at Fidelity made the statement in an open letter to the government as the average pay of FTSE executives has increased four-fold from 1998 to 2010.

Prime minister David Cameron has vowed to crack down on the ‘rewards for failure’ culture. Cameron's promise may be put to the test as Royal Bank of Scotland (RBS.L) has proposed a £1 million bonus for chief executive, Stephen Hester, although the bank's share price has tumbled over the past year.  

Fidelity is one of the leading fund management groups in the City of London, with 740 funds and £165.5 billion under in assets under management.

Under proposals put forward by the group, 75% of shareholders would need to approve directors' pay each year. 

Rossi said: ‘During the last bull market, board room pay dramatically increased relative to the average pay of all employees in a company. Despite the financial crisis of 2008, this trend is continuing. The simple truth is that remuneration schemes have become too complex and, in some cases, too generous and out-of-line with the interests of investors.

‘We say to remuneration committees: Make sure you understand the mood of the market; tell us in simple terms what you propose; and let shareholders decide. Companies have nothing to fear if what they propose is fair and reasonable and clearly aligned to what is good for long-term shareholders.’

Other fund managers have also come to the fore on the issue. Nick Train, managing director and co-founder of Lindsell Train agrees with the calls for greater shareholder engagement on executive pay.

Train says: ‘Ownership of a company brings responsibilities as well as potential benefits and it’s important for owners of businesses to think hard about the incentives that company management are being motivated by.

‘I’m all for shareholder engagement in important issues like investor remuneration. In a liberal economy the relationship between the agents and owners is critical.’

But ethical investment groups have been calling for more active and responsible ownership from shareholders for some time.

Penny Shepherd, head of UK Sustainable Investment and Finance (UKSIF) says: ‘The common criticism of pay schemes is that they can sometimes be so complicated that it is difficult even for experts in corporate governance to understand what they will mean in practice, so there is an emerging argument that simplification is part of the answer.’