The
Confederation of British Industry (CBI) has announced its best practice
guidelines in response to the DTI’s consultation document on ‘Rewards for
Failure’.
The
response is intended to provide a flexible and transparent framework on
directors’ severance packages and includes six key principles which could be
used by companies as a benchmark for all executive director contracts.
Digby
Jones, CBI director general, said the framework was designed to stop ‘fat cat’
bosses "getting a big cheque on Monday and getting a new job on
Tuesday". He added that it balanced flexibility with a major change of
approach from the passive to the pro-active on the part of parties involved.
"I
hope it will go a long way towards rebuilding shareholder and public
confidence," he said.
Jones
warned against government legislation on rewards for failure, saying defining
‘failure’ would be too difficult and that the implementation of any new law
would be intensely damaging to UK competitiveness.
The
six best practise guidelines are:
–
Key contractual guidelines should be announced to shareholders immediately
after the parties are committed to each other, and severance details should
also be announced after agreement between the company and individual
–
The terminology used to describe each clause in the contract must be made clear
to ensure the reader can determine the precise nature of the agreed terms and
conditions
–
Severance arrangements should be restricted to entitlement to basic pay and
consequential payments, and should take account of the circumstances of
termination and of the individual’s duty and opportunity to mitigate loss, so
as to reduce costs to the company. Payments should be made monthly unless there
are special circumstances which should be clearly explained to shareholders.
–
Directors should have no longer than one year notice or contract periods in
normal circumstances
–
Newly appointed directors should have terms and conditions which are comparable
to those of incumbent board directors within a maximum of two years following
recruitment
–
A proportion of directors’ remuneration should be equity-based.
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