Hewitt seeks to curb huge payouts for failed fat cats

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A new law curbing multimillion-pound pay-offs and share options for failed "fat cat" executives is to be proposed by the Government tomorrow in response to the public outcry over directors' pay.

Executives leaving failing companies would have their compensation restricted to six months of their salary under proposals to be published tomorrow by Patricia Hewitt, the Secretary of State for Trade and Industry. The consultation document will recommend that directors' pay be linked more closely to the performance of their companies, with an end to so-called "golden parachutes" for useless bosses.

Company boards could be given powers to overrule the remuneration of failed directors in one option to be floated in the consultation paper, entitled Reward for Failure. The paper is also expected to propose giving directors ordinary shares - which fluctuate with the performance of their company - rather than share options they can cash in when the stock market value is high.

Framed as a series of questions, with the pros and cons mapped out, the document will ask whether a change to company law or a code of practice is the best way of curbing failed fat-cat excesses.

Ms Hewitt told The Independent that, contrary to some reports, she had "not ruled out" changing the law to stop failed executives walking away with millions of pounds when share prices are tumbling or jobs are being lost.

"People have been going round saying we have ruled out the option of legislation. We have actually not ruled out any option," she said.

Ms Hewitt said the Government's overriding aim was not to penalise successful businessmen but to curb rewards for those who run companies down. She said the size of some payouts for failed executives were "an insult".

"I don't have any problem with big rewards for big success, I believe in performance-related pay. We want successful business leaders and successful businesses because we all depend on them, but what is insulting is these huge payouts for failure, when people are losing their jobs and investors are losing their savings," she said.

"I think people are absolutely right to be very angry when directors leave companies that have performed very poorly and are then given big rewards for failure."

Investors have recently rebelled at GlaxoSmithKline, Shell, Reuters and HSBC over multimillion-pound rewards to directors. Ms Hewitt said: "When you have got people losing their jobs and investors losing their savings, and the people who made the decisions are walking away with huge payouts and huge pensions then of course they are entitled to be angry. The more you link the pay of directors to performance, the better."

The consultation, which runs until September, will ask whether directors' one- or two- year "rolling contracts" should be shortened, with notice periods of about six months. It will ask if multimillion-pound, lump-sum severance packages should be replaced by staggered pay-offs.

It will also consider proposals put forward by Archie Norman, the Tory MP and businessman, to give boards the power to query directors' severance deals, even if they are in their contracts. But Whitehall sources said the Government was unlikely to act on this because it could lead to employees' contracts being overruled.

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