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Fidelity backs UK government's plans to give shareholders power to veto executive pay and bonus packages
Fidelity, one of the biggest investors in the stock market, has spoken out against "over-generous" and "over-complex" boardroom pay and called for shareholders to be given extra powers to vote down cash and share deals.
In a move that supports the government's plans to hand shareholders more rights to veto pay deals, Fidelity argues that remuneration reports should be backed by 75% of investors – compared with 50% now – and the vote should take place before any bonus is handed to a director.
Using unusually confrontational language for a major investor more accustomed to operating behind the scenes, Dominic Rossi, chief investment officer of equities at Fidelity Worldwide Investment, said more transparency was needed on executive pay.
"During the last bull market, boardroom 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," Rossi said.
He argued that remuneration committees – the sub-committee of boards that set executive pay – need to be more sensitive to the current mood.
"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," said Rossi, who was speaking for a fund management firm that manages more than £165m of assets.
If the remuneration report fails to attract 75% support, it should be put to a second vote and if it fails again, the chair of the remuneration committee should step down.
His remarks come at a critical time for the government, which has pledged to offer shareholders a binding vote on remuneration reports, in contrast to the current rules introduced in 2003 that grant investors an advisory vote on pay.
The prospect of a binding vote has proved controversial with some investors after data from shareholder advisory group Pirc found just 18 remuneration reports had been defeated since the advisory voted was introduced. Fidelity's support for a binding vote – and at a 75% threshold – coincided with a demand by shadow business secretary Chuka Ummuna that Vince Cable, the business secretary, deliver his proposals on executive pay to the Commons on Tuesday.
Cable is preparing to announce his response to last year's consultation on executive pay in a speech at the Social Market Foundation. He is expected to step back from an idea to place workers' representatives on remuneration committees. Another idea, part of the consultation that closed last year, was to require companies to publish a ratio of executive pay relative to those outside the boardroom. David Cameron has already indicated the ratio proposals are unlikely to be taken forward, although Cable is expected to say he wants workers to be more closely involved in the way executive pay is set.
Raising a point of order in the Commons, Ummuna said Cable should not be able to duck taking questions on the proposals to crack down on top pay.
Ummuna said: "Executive pay and rewards for failure in the country's boardrooms and the City are a matter of immense public interest – it is right and proper that any policy change in this area by the government should first be announced to parliament and that the people's elected representatives be given the opportunity to question the business secretary on it".
The Department of Business, Innovation and Skills launched a consultation on executive remuneration last year when Cable was attacked by the new director-general of the British Chambers of Commerce, who called it a "hobby horse project".
The public mood appears to have hardened since then, as Cameron and his minister have pledged to crack down on executive pay and have seized upon a report by the High Pay Commission, funded by leftwing pressure group Compass and backed by money from the Joseph Rowntree Charitable Trust, that warned how "corrosive" high pay was to the wider economy.