Fund Manager Profile: Robert Talbut, Royal London Asset Management

One of Britain’s biggest businesses is likely to lengthen its executive remuneration scheme from three years to five, a change that would put pressure on other major companies to change the way they reward the UK’s most senior managers.

Robert Talbut, chief investment officer at Royal London Asset Management (RLAM), tells Inside Investor Relations that a specific FTSE 100 company will announce the reform of its pay scheme for executives within the coming months. 

That would create conditions in which other businesses could face pressure from some institutional shareholders to follow suit. Talbut could not say which sector the company is in, but he adds: ‘If one company does it, it will open the debate about whether a three-year cycle is too short.’

Talbut’s views carry weight because he has a reputation for intervening in the debate about performance-linked pay and because RLAM has more than £40 bn ($64 bn) of assets under management. He has warned that leading companies have begun to bring back pay schemes that are not clearly linked to share price performance, or are similar to the structures used before the financial crisis.

What must executive pay do to create the right incentives?

There must be a clear link between pay and performance. Recently, however, the schemes have become more elaborate. This is not just a problem for retail investors; institutional shareholders also believe many compensation structures are just too complex. When a new remuneration scheme appears, we have to wrap a cold towel around our heads. 

In theory, the incentives don’t work if they are too complicated. Complexity means uncertainty for shareholders about cost and about what shareholders are being asked to sign up for. Unless we can clearly link pay to strategy, performance and risk, we have little prospect of improving confidence that current practice brings benefits to shareholders, voters and ministers.

Variable pay should be about encouraging the right sort of behaviour, which is consistent with the company’s strategy. There has perhaps been insufficient clarity about the way in which variable pay relates to a group’s strategic plan, and there is just too much similarity and consistency among groups from different sectors. In the last 10 years, there has been a relatively off-the-shelf approach to how you put a pay scheme together. We need a more bespoke approach.

If companies ignore the political context, will ministers react with rhetoric or action?

The rhetoric will potentially be ratcheted further. I don’t think anyone should be under any illusion about the economic conditions we are going to face in the next 18 months. Politicians will not be silent unless there is improving alignment and transparency in this process about pay, and there is a danger they will feel they must act.

Bankers’ pay needs a global solution. Do you expect one?

Not this side of the next crisis. Commentators and politicians in the UK are excited about [banking] issues, which are not getting that attention outside Britain, so it’s very difficult to get agreement. The UK going it alone risks putting us at a severe disadvantage.

If banks were significantly smaller as a proportion of the British economy, would that be a price worth paying for greater financial stability? What would you replace the banks with? And if the UK does not have globally competitive banks here, would it have globally competitive companies here? If you are going to have that debate, what would the consequences be? There are risks both ways – but let’s understand them.

MEPs in the European Parliament this month passed a non-binding vote for a 0.05 per cent tax on financial transactions. Are they right?

The received wisdom for the last 20 years has been that we must do all that is possible to improve liquidity in the financial markets, to make it easier for people to trade, so we cut the cost of capital and create wealth. It’s a legitimate question to ask: has the pendulum swung too far, toward encouraging trading activity? What are financial markets for? To match the suppliers of capital to the users. Arguably we have lost sight of that.

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