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Directors' cash `should match their performance'

Directors should cut their pay if they fail to deliver high performance and must not reward themselves with pay increases when the company - or its staff - is having a tough time, the Institute of Directors said yesterday.

Tim Melville-Ross, the director-general, was launching the IoD's new pay guidelines for directors, a response to a wave of public criticism that he said risked bringing capitalism into disrepute if nothing was done.

Mr Melville-Ross claimed the number of directors who paid themselves excessive increases was small and he said there was no reason why those who achieved good results should not be highly paid, as they were in other walks of life.

But high performance should be the norm, and only "really exceptional'' performance should be rewarded with salary increases, Mr Melville-Ross said.

"Indeed, if you fall below that, you should be penalised,'' he added.

Against the background of British Gas's decision to announce a pay rise for its chief executive at a time of price rises, safety cuts and job losses, Mr Melville-Ross said: "We don't think it is terribly intelligent when people make significant improvements in remuneration packages at a difficult time for the company generally.''

The guidelines say staff salaries and employment conditions should be borne in mind when setting directors' pay.

Mr Melville-Ross attacked a widely-used argument to justify sudden, large pay increases - that without them (pay increases) key people would be enticed to work abroad.

In most cases, directors would not accept a job abroad, and it was up to companies to determine just how likely an individual was to get a job in the international marketplace before using the threat as a reason for a salary increase, Mr Melville-Ross said.

The toughest part of the guidelines is a demand for detailed disclosure of each director's pay and perks, including share options, bonuses, pensions and cars. At present the chairman is the only named director whose earnings are disclosed.

Mr Melville-Ross said he hoped that as a consequence of the guidelines, which have no sanctions attached, and rely on publicity and pressure from shareholders to stop abuses, "the standing of directors will be gradually restored''.

He is a member of a committee on executive pay rises, set up last week under the chairmanship of Sir Richard Greenbury, chairman of Marks & Spencer.

"I would be very surprised if the Greenbury Committee came to significantly different conclusions from this,'' Mr Melville-Ross said.