Men with the golden touch: Contracts allowing departing executives huge compensation payments are coming under fire, Elizabeth Heathcote reports

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The Independent Online
AS THE pace of top-level sackings, resignations and retirements heats up, the normal grumbling at the level of severance payments is becoming a clamour. A growing number of institutional investors and other key shareholders think that the length of service contracts, which form the basis for the huge payments associated with executive departures, should be reined in.

The latest wave of departures has included Bob Horton, who left BP at the end of June, Brian Disbury of Mosaic Investments, Tony Millar of Albert Fisher and Lord Stephens of Invesco MIM.

'We are handling more assignments for chairmen and chief executives than at any time during the 20 years I have worked here,' Brian Burwash, a director at GKR, the executive headhunters, said. 'Companies are looking at their most senior management more closely than ever before. The term 'resigned' can cover many secrets.'

In nearly every case some sort of compensation is paid, and this is usually generous: six- or even seven-figure sums are not uncommon. While details of the most recent pay-offs have not been released, figures from earlier in the year give an indication of their scale. Burton, for example, lived up to its reputation for extra- golden handshakes with a pounds 773,000 payment to Laurence Cooklin. Northumbria Fine Foods' chairman and chief executive, Richard Adams, received pounds 225,000 after 'tiffing' with the board in June. It is reckoned that Mr Horton's compensation may be as high as pounds 2m.

Shareholders often complain about what they see as rewards for failure, but companies usually bite the bullet and pay up, however dissatisfied they may be. The alternative - to publicly brand the boss as incompetent - is fraught with potential problems. 'Unless they could prove they had good cause, they could land themselves with a lawsuit,' Anthony Williams, director of remuneration at Hay Management Consultants, said.

'It is very rare to find someone in a very senior position sacked for incompetence,' said Ronnie Fox, a senior partner at the solicitors Fox Williams. 'Companies have an interest in being generous.' This could be out of fear of negative publicity from a legal battle, or simply because, as Mr Fox pointed out, 'the people asking the chap to leave know they may well be in the same position themselves in the future'.

Mr Fox has specialised in negotiating top-level settlements for more than 10 years, and has acted for companies and for executives. His services are sought once the decision to part is final. 'The crucial question then is what is a fair deal,' he said, 'and the starting point for that is what the executive would have earned had things worked out and the contract been completed.'

In many cases, the haggling is based around each party's impression of how long it will take the executive to find alternative employment. But at really top levels this becomes increasingly irrelevant. 'Someone very senior whose name is synonymous with a company may never get another job,' Mr Fox said.

The service contract of a top director, negotiated on appointment, will inevitably include a lengthy notice period. In the past, this could have been seven years or more, but the norm these days, as recommended by the Cadbury report on corporate governance, is three. The salary and perks that would have been earned during this period provide the normal starting point for severance negotiations, hence the huge payouts.

A lengthy service contract is of little benefit to the company. The executive's notice commitment is generally much shorter. Rather it is seen as a perk and an insurance policy, the price a company has to pay to persuade the chairman or chief executive it wants to uproot.

However, David Rough, group director of investments for Legal and General, said: 'Contracts longer than three years are not appropriate.' Others wonder whether even this is too long if top- level reshuffles continue at their current rate.

Concern at the pay-off is only one aspect of the increasing involvement of large shareholders. 'Institutions over the last three years have certainly taken their responsibilities as shareholders more seriously, in part at least because of the recession,' Mr Rough said.

'Institutional investors are expressing more willingness to exert their clout than ever before,' Mr Williams said, 'and the reason for that will not go away. They now own such large blocks of shares that they cannot easily dispose of them if they become concerned. It is much easier for them to pick up the phone and have a quiet word.'

The chances are that this word may be with a non-executive director. More confident than ever of institutional backing, non-execs are becoming increasingly active, leading to boardroom coups such as the one that ousted Mr Horton. 'More people are looking to non- execs to take the action,' said Colin St Johnston, managing director of ProNed, an organisation that promotes non-executive directors.

'They are the only people who can effect a coup. If it comes from the executive directors, the chief executive will just fire them.'

This increased pressure should in theory help those who want to shorten contract terms. But the increase in turnover at the top militates in the opposite direction. 'If you look at the current situation, there are companies in trouble trying to attract top people from companies that are doing very well,' Mr Williams said. 'Those executives are obviously going to insist on pretty good terms.'

Mr Fox agreed, but said things would change. 'Notice periods will become shorter and salaries higher,' he said. 'I think that people paid large sums will in the future be under a lot of pressure to perform and to make the share price perform. If it does not, they will go.'

(Photographs omitted)