ABI warns against making undeserved payments to executives

Insurers must not reward failed executives, the ABI and National Association of Pension Funds (NAPF) have warned.

As the UK enters stormy economic waters, the two trade bodies have reissued a statement outlining the steps companies should take to try to avoid making undeserved payments to executives and senior staff.

Marc Jobling, assistant director of Investment Affairs at the ABI, said it was a good time to reiterate the principles.

“If you were in the situation where times are tougher, the chances are that companies could suffer as well, and that might result in a need for directors to leave the company,” he said.

The statement was designed to limit payments to failed executives, both in terms of contracts and severance deals.

It called on companies to ensure that they do not write contracts that commit them to pay for failure, recommended. It also said that severance payments should be made on a phased basis rather than in one lump sum, and it called on boards to disclose and justify pension enhancement.

Jobling added: “It needs to be understood that rewarding for failure is unacceptable.”

The new statement details eight principles, including shortening the notice periods in directors’ contracts, and urges remuneration committees to ensure that policy and objectives in directors’ contracts are clearly stated in the remuneration report.

David Paterson, head of corporate governance at the NAPF, said: “Disclosure standards on remuneration policy have improved markedly since this statement was first published, as has alignment between management and shareholder interests.

“The republication of the joint statement serves as a timely reminder of shareholders’ expectations when directors are required to address the difficult question of severance terms.”

Guidelines for executive contracts

Notice periods – boards should consider shorter notice periods in directors’ contracts.

Severance payments – remuneration committees to justify severance payments and importance of not rewarding failure.

Contract terms – committees should also ensure that policy and objectives on directors’ contracts are stated in the remuneration report.

Pensions – regular reviews by committees to ensure no unmerited payments in the event of severance.

Executive commitment – boards should ensure executives align their financial interests with those of the company.