Fidelity Worldwide Investment has taken a stand against long-term incentives paid to chief executives in a bid to more closely link bosses’ pay to a company’s overall performance.
The fund manager, which is one of the leading shareholders in a third of FTSE 100 firms and a number of prominent European companies, has warned the hundreds of companies it invests in to reform their remuneration policies or face strong shareholder action.
Fidelity says it will vote against any executive remuneration plans at annual meetings should steps not be taken. From October, shareholder votes will become binding and require companies to change policy if more than half of investors reject plans for increased pay.
Fidelity’s chief information officer for equities, Dominic Rossi, has also suggested a modest reform in the period for which top executives are required to hold their shares. Currently, long-term incentive plans have a vesting period of three years; Rossi would like executives to be forced to hold onto shares for a further two years.
‘Extending holding periods to a minimum of five years is easy to operate,’ says Rossi. ‘It will result in a far better alignment of executive compensation and the longer-term performance of the company.’
It’s hoped the proposed change will encourage companies to plan for the long term more effectively, rather than support quick-fix policies with only short-term benefits. Fidelity was prompted into action after writing to each of the FTSE 350 last summer, when it discovered that only 14 companies had extended five-year incentive schemes.
A number of other groups that already fit with Fidelity’s plans, including Barclays, HSBC and BHP Billiton, are said to support the proposals. Others have told the fund manager they need to retain the flexibility of allowing executives to sell their shares after three years should they wish to, in the hope of attracting the best performers.
