Ousted directors 'should be limited to one-year pay-offs'

Pay-offs for chief executives and company directors who quit or are fired should be limited to a year's salary, the government committee conducting a review of company law recommended yesterday.

Pay-offs for chief executives and company directors who quit or are fired should be limited to a year's salary, the government committee conducting a review of company law recommended yesterday.

However, in cases where the director is recruited from outside, companies could allow three-year contracts but only for an initial period and subject to shareholder approval.

The committee also recommended that "golden parachutes" - clauses in directors' contracts that force options and other benefits to be bought out in the event of a company merger or takeover - also be capped at one year.

The proposals form part of the second report of the company law steering committee, set up in 1998 by Margaret Beckett while she was trade and industry secretary. The review, which is expected to lead to the biggest overhaul of company legislation in the UK for 100 years, is due to be completed next year.

The report also recommends the establishment of a commission to keep company law under permanent review, and a widening of directors' responsibilities. Companies will also be required to disclose the impact of their decisions on other stakeholders, such as the community, employees and suppliers through an audited operating and financial review.

Controversy over so-called "payments for failure" has been restoked by the £2m payment Bob Ayling, the former British Airways chief executive, received after his disastrous tenure ended earlier this year. There is also likely to be debate about any compensation that Gerald Corbett may receive after stepping down as chief executive of Railtrack, the rail infrastructure group, following the Hatfield rail crash.

The proposals on pay, which go further than many in the City expected, are likely to be seen as politically motivated. The committee had been leaning towards five years as a maximum rather than three.

In practice the proposals are less draconian than they appear. There is nothing in yesterday's report to prevent incoming chief executives, in effect, writing their own terms of employment, provided shareholder approval is sought.

However, the idea that such matters as directors' remuneration should be dealt with by legislation sparked some concern in City circles yesterday.

Although City institutions say they are concerned that failure should not be rewarded, they say that pay is best dealt with under the umbrella of the Combined Greenbury and Cadbury Corporate Governance Codes rather than through legislation.

There was also concern that the key plank of yesterday's report - the establishment of a panoply of committees which would police company reporting standards and recommend changes in practice - would create a new bureaucracy.

However, recommendations that company law should explicitly reflect companies' wider responsibilities was welcomed by Mark Goyder, of the Centre for Tomorrow's Company. He said: "Saying that directors are really responsible for long-term wealth creation is a serious challenge to the way things are done at the moment."