Leading City investors, who have mounted a spring offensive on boardroom pay, opened a new front in the battle yesterday when two top fund managers blamed consultants for allowing performance-linked pay in financial services to spiral out of control.

Mark Burgess, head of active equities at Legal & General Investment Management (LGIM), told an Association of British Insurers (ABI) investor conference: “The compensation arms race that we’ve had in remuneration, driven by pay consultants, is neither viable, tenable, appropriate nor desirable.”

Robert Talbut, the chief investment officer at Royal London Asset Management, echoed Mr Burgess’s comments: “We’ve all got a problem with those organisations that operate in the background. It’s not desperately clear who they are working for and it seems that they operate on the basis that the best advice to give executives is that they are massively underpaid.”

He warned companies to keep the lid on pay. “The idea that the incentive needs to be huge to elicit the right kind of behaviour is wrong. Institutional investors have got to get more used to saying ‘no’.”

Pay consultants have a thriving industry advising large corporations, in particular compensation committees, on what is deemed right, what is the market and what needs to be required and reported. They use a range of yardsticks, including international comparisons, earnings per share and operating profit and its variants.

Mr Burgess said that LGIM had had “significant differences of opinion” over remuneration targets at companies visited recently, but he was not opposed in principle to rewards based on individual performance. “If you have an organisation with a strategic objective and individuals deliver, then the company should deliver and we all should be happy,” he said.

City investors have vetoed remuneration reports this year at Royal Dutch Shell, the oil and gas group, and Provident Financial, the sub-prime lender.

Yesterday’s attack came as it emerged that Man Group, the world’s biggest listed hedge fund manager, had paid Peter Clarke, its chief executive, $14.4 million (£8.8 million) last year. The payments to Mr Clarke, who received $27.5 million in salary and bonuses in 2007, came after Man’s profits tumbled, investors redeemed assets and its share price halved. Last month, Man reported a 40 per cent slide in pre-tax profits to $1.2 billion for the year to the end of March.

According to Man’s annual report, published yesterday, Mr Clarke collected a $6 million cash bonus on top of his $920,000 base salary and a further $7.4 million in shares and options.

Hedge funds worldwide have suffered their worst year on record. Man’s flagship RMF Four Seasons and Glenwood strategies lost investors 15.6 per cent and 16.7 per cent of their capital last year as the industry plummeted to its first annual loss in ten years and returns fell on average by 18.7 per cent.

Man’s funds under management dropped by $900 million to $46.8 billion during the period, with institutions redeeming a further $3.6 billion from its funds during the following eight weeks. Its profits and reputation were dented after it lost $360 million of client money to Bernard Madoff’s fraudulent Ponzi investment scheme.

Man’s share price fell from 620p last June to a close of 268p last night.

Mr Clarke’s bonus arrangements are discretionary and are based on his performance on strategy, financial and qualitative measures, Man said. Several institutional investors contacted by The Times yesterday said that they had not yet decided whether to protest over remuneration at Man.

The hedge fund manager holds its annual meeting in London on July 9.

Man Group declined to comment on Mr Clarke’s remuneration. However, one source close to the company noted that his total compensation had fallen by 46 per cent year-on-year.

Bonuses backlash

George Osborne, the Shadow Chancellor, told the conference that it would be a “huge mistake” for the City to reward financial services executives after the public had to pay for the near-collapse of the banking sector.

“Some banks are now making big profits from higher margins underpinned by the taxpayer guarantee. It would be a huge mistake if they pay huge bonuses at this year-end on the back of government-supported profits,” he said.

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