BlackRock to U.K. Corporations: Link Pay to Performance, or Face Shareholder Backlash

The U.K.'s corporate leaders were served notice this week: Start cutting boardroom pay and pension entitlements for top executives, or face a shareholder revolt.

BlackRock Corp., the world's top asset management company, warned the U.K.'s top-ranking companies on Monday that they must start linking pay to performance and find ways to shore up the inequity between executive and standard worker pay rates.

The U.S.-based funds manager informed companies listed on London's Financial Times Stock Exchange (FTSE) 350 index that new contracts must be in line with how the rest of the companies' workforces are being paid. Approximately half of the FTSE 350 are preparing to submit their pay contracts for shareholder approval in the coming months.

"We consider misalignment of pay with performance as an indication of insufficient board oversight, which calls into question the quality of the board. We believe that shareholders should hold directors to a high standard in this regard," Blackrock said, via a letter sent to more than 300 companies' executive boards.

The letter comes amid increasing pressure for Britain's largest employers to narrow the inequity between boardroom and standard workforce pay. According to the financial think tank High Pay Center, Britain's highest-paid execs earn more in two days than most workers make in a year.

"The average pay ratio between FTSE100 CEOs and the average total pay of their employees in 2015 was 129:1," the NGO states."The figures show that pay for top company executives returning to work this new year will pass the U.K. average salary of [US$34,600 annually] ... by around mid-day on 'Fat Cat Wednesday.'" The nonprofit is calling on companies to make their pay ratios public and help track progress "on closing this gap."

Blackrock's warning isn't really a surprise to many of U.K.'s top companies.

Last year shareholders refused to approve a US$17 million pay increase for BP's top executive after the company reported substantial losses that resulted in freezing employees' pay.

Other companies, including the medical equipment company Smith & Nephew, have faced similar criticism -- leading BlackRock to caution corporations about proposing executive increases that aren't accompanied with "strong supporting rationale." The asset manager continued: "Large increases should not be justified principally by benchmarking.”

Some executives who found themselves under fire say the scrutiny is unfair. Sir Martin Sorrell, who founded Wire and Plastics Products in 1985, is up for a pay increase this year. If shareholders approve the proposal, he'll be earning roughly $86 million.

"WPP capitalized at [1 million British pounds in 1985]," Sorrell said, noting that it's now valued at around $26 million. "Over those 31 years … I have taken a significant degree of risk. [WPP] is where my wealth is. It is a long effort over a long period of time."

Sorrell has faced stiff opposition from shareholders in the past. He's likely to see a repeat of that when the pay increase comes up for a vote in June.

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