The National Association of Pension Funds (NAPF) has told Britain’s biggest companies to keep the lid on executive pay and bonuses or risk shareholder revolts, as it steps up its campaign to improve corporate governance in UK boardrooms.

The NAPF, whose members own about 13 per cent of the stock market, has written to all FTSE 350 chairmen urging them to exercise “pay restraint” for their highest earners. In the letter, seen by The Times, the NAPF demands remuneration structures that are more closely matched to the interests of shareholders and calls on every company to carry out a “best practice” review of its compensation culture.

“The objective should be to create simpler structures which better align interests over the longer term and which expose management to significant financial risk in the event of failure to achieve agreed goals,” the NAPF writes in the letter, which is signed by Joanne Segars, chief executive, and David Paterson, head of corporate governance at the association.

Mr Paterson adds: “Pay increases ought to be earned, as is the case for most of the rest of us. There is also the question of ensuring a recognition that bonuses are essentially a share of the profits. If profits are down, bonuses should be down.”

While the NAPF does not recommend how shareholders should vote at company meetings, Mr Paterson says it would urge its members to engage directly with company boards in consultations over pay. He says it is hoping to use the guidelines to lay down a policy marker that funds could use when deciding which way to vote.

The NAPF speaks for about 1,200 UK pension funds, which between them control about £800 billion of assets. It is the NAPF’s second letter to FTSE 350 chairman this year and marks a step-change in the association’s traditionally low-key approach.

Investors, including pension funds, were accused of being “absentee landlords” at “ownerless corporations” in the run-up to last year’s banking crisis. Lord Myners, the City Minister, and other politicians have urged shareholders to engage with errant companies more actively, prompting a rash of protests over pay at blue-chip companies such as Royal Dutch Shell, BP and Royal Bank of Scotland.

Sir David Walker’s final code on remuneration policies at banks is expected in about a fortnight.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive