Mandy Perry, associate in the employment team at Jones Day Gouldens, offers advice on drawing up a guide on executive pay
The remuneration of senior executives continues to grab headlines. In May the shareholders at GlaxoSmithKline mounted a successful rebellion against the company's executive remuneration policy and in particular, the severance package contained in the chief executive's contract.
This vote came on the back of trade and industry secretary Patricia Hewitt’s announcement that she is going to address what she terms is the “rewards for failure” culture, by initially releasing a consultation paper this summer which will look at ways of legislating to limit so called ‘fat cat’ salaries.
The policy’s aims
Remuneration issues should be dealt with in the contract of employment, and the policy should be used as a guide for those drafting the contract to help them consider what should be included.
During the initial stages of the employment relationship, when an employer may have gone through considerable efforts to get an executive on board, it is often possible for the parties involved to produce such things as loosely worded bonus clauses or to fail to fully deal with what will happen when the relationship ends.
It is vital that the employer considers these issues at the beginning of the relationship because it is often the only chance it will have. The policy will help to achieve this.
In addition to the Combined Code 1998, the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI) released a joint statement of best practice on executive contracts and severance in November 2002. Its main points are:
- Phased Payments: payments in lieu of notice should be paid in monthly instalments so these payments can be stopped as soon as the executive finds new employment
- Liquidated Damages: agreement at the outset on the amount that will be paid in the event of severance is discouraged, as are change of control clauses (severance payments on change of control of the company) other than in