Remuneration transparency – Remuneration has been unduly complex and reporting unduly opaque in too many cases. We suggest a simpler template for remuneration and its reporting. We back the BIS recommendation for analysis of what might be paid out under different conditions.

We also want the remuneration report to have a catch all clause at the end where the board would have to disclose anything of material interest to shareholders. Pension hikes like that given to Fred Goodwin would simply not be possible to hide.

Tying compensation to performance – We believe that 50 percent of all variable should be deferred for a minimum of five years, with no more than straight-line vesting (i.e., no more than 10 percent paid out in each of the next five years). The deferred compensation would also have to be in shares. That would ensure that on average 150 percent of variable compensation would be linked into the performance of the company.

We would also extend the calculation period for long term performance plans to five years from the current three years. With the deferral of compensation, some pay would be exposed to the performance of the company over 10 years. It would be much harder for executives to be paid merely for being lucky enough to be in charge of a company in a period of growth.

Clawback – We believe that all deferred executive compensation should be subject to clawback. Long-term incentive plans generally pay out when certain targets are hit and the better targets are hit the greater the payout.

We propose that there should be downside conditions, which, if hit, would trigger payments back from executives. These targets would be set such that an executive would have failed if they were hit. If they were all hit to the maximum extent then all the deferred compensation would have to be paid back. This should address once and for all the problem of rewards for failure and if set correctly should also encourage CEOs to be prudent and not recklessly chase the upside targets.

We also think there are things that should not be done. Caps on ratios of executive to employee pay are arbitrary and would involve politicians in the pay process of executives – that is not desirable. We oppose an exit cap on pay for much the same reason. A properly implemented clawback would be much more effective. In the case of real failure they would likely be paying shareholders back instead.

Finally, we do not think employees should either have representation on boards or have a vote on executive pay. Aside from the practical problems shareholders own the companies and they should determine the pay.

To read the full Policy Exchange report on executive compensation, click here.

For more information on Policy Exchange, click here. For more information on the work of Policy Exchange's Financial Policy Unit, please contact James Barty, senior consultant.