New clamp on 'failure' pay-offs

BOARDROOM 'bungle pay-offs' may be capped at only six months' salary to end the damaging spectacle of sacked bosses receiving multi-million pound compensation cheques.

The idea is being considered by officials at the Department of Trade and Industry drafting a paper on the 'rewards for failure' problem.

It was favourably received at a high level seminar held last week at the Commons office of Tory backbencher Archie Norman and attended by senior representatives of the National Association of Pension Funds, the Association of British Insurers, the Institute of Directors and the Government.

The proposal would require only a simple amendment of the Higgs version of the code on corporate governance, which says directors' notice periods 'should be set at one year or less'.

It emerged after Norman sponsored a Private Members' Bill last year that would have prevented companies giving huge pay-offs to directors dismissed for poor performance.

Although the Bill received widespread support from MPs, it was opposed by the Government and blocked in the Commons. However, Trade and Industry Secretary Patricia Hewitt did pledge at the time to come up with alternative ideas.

One of those attending last week's Commons meeting said: 'The six months' notice idea seemed to have widespread support and seemed to be less contentious than you might have thought.'

It will now be considered by David Stiles, the DTI civil servant drawing up the consultation paper, which is due to be published by the end of this month

The idea has the benefit of simplicity - it does not require complex legislation - and would be popular with voters who have been appalled by the scale of the largesse for underperforming directors.

Yesterday it was revealed that the former chief executive of troubled insurer Royal & SunAlliance Bob Mendelsohn received a £1.44m pay-off - around 18 months' salary - after he was ousted in September. It was the latest in a series of boardroom pay-offs that have dismayed City institutions.

Others include the £7.4m paid to EMI director Ken Berry, the £2.8m that went to Marconi finance director John Mayo and the £1.5m pocketed by BT chief executive Sir Peter Bonfield.

The length of notice periods for directors has come down progressively over the past 15 years with each wave of public outrage over pay-offs.

In the 1980s three or even five-year compensation packages were not unusual. In the Nineties it came down to a maximum two years, but one year has been regarded as the accepted 'best practice' norm since the Greenbury Code was published in 1995.