'Restraint' demanded on bonuses

The National Association of Pension Funds (NAPF) - which represents 1,200 pension schemes controlling assets of around £800 billion - has written to chairmen of the country's 350 biggest businesses to reinforce their demands on executive rewards.

In the letter the NAPF called for a review of accepted best practice remuneration policies, which it said failed to serve management and shareholders well.

"The objective should be to create simpler structures which better align interests over the long term and which expose management to significant financial risk in the event of failure to achieve agreed goals," it said.

The organisation welcomed increased share ownership by management as a way of ensuring executives have financial stakes in firms.

And it called for an increase in the practice of paying deferred bonuses in shares rather than cash.

NAPF, which wrote to the firms initially in February, said there was a "continued need for restraint" on executive pay and warned that it would maintain pressure over remuneration policies.

David Paterson, head of corporate governance, said the group appreciated that companies had made efforts to constrain pay policies this year.

But it stressed the importance of continuing to link rewards to results and the long-term interests of shareholders.

"Shareholders in turn need to play their part by remaining vigilant and ensuring that boards are held to account for their pay policies through ongoing discussion and also by the use of their votes at annual general meetings," he said.

"Through its regular engagement work, the NAPF will be pressing companies to explain how their remuneration policies help align management with the interests of long-term investors."

Shareholders have faced criticism for not holding firms to account on their pay and risk policies in the past, but many have suffered steep losses this year following the financial crisis.

NAPF said it wants boards to pay particular attention to the way in which profits are split between staff remuneration, shareholders and the company.

It said this was a particularly important point in a year in which many firms have turned to shareholders for extra funds, while also cutting dividend payments.