Executive contracts and severance guidelines
03/03/2008
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Many aspects of Australian executive remuneration are governed by standards that originated in the UK.  Recently the two major groups representing institutional investors in the UK updated their joint statement on executive contracts and severance.

The ABI (Association of British Insurers) is the trade association for Britain’s insurance industry. Its nearly 400 member companies provide over 94% of the insurance business in the UK.  The NAPF (National Association of Pension Funds) is the leading voice of workplace pension provision in the UK. NAPF Member schemes hold assets of around £800bn, and account for approximately one fifth of investment in the UK stock market.

Their statement, first published in 2002, assists companies with the design and application of contracts for when senior staff depart. Shareholders also use it when assessing whether a situation exists where failure is being rewarded.

Executives of both made statements via their joint press release.

Peter Montagnon, the ABI’s Director of Investment Affairs, said:

“The original statement has served us well. We are grateful for companies’ responses, but we cannot afford to be complacent. With the economic cycle apparently turning, now is a good time to remember that severance arrangements which reward underperformance damage the standing of business and undermine the integrity of executive remuneration, making it harder to reward success.”

NAPF Head of Corporate Governance, David Paterson, said:

“Disclosure standards on remuneration policy have improved markedly since this statement was first published, as has alignment between management and shareholder interests. The re-publication of the joint statement serves as a timely reminder of shareholders’ expectations when directors are required to address the difficult question of severance terms.”

The new Statement contains eight Principles, including:

• Notice Periods – encouragement is now given to boards to consider making (executive) directors’ contracts with a shorter notice period than the standard 12 months.

• Severance Payments – responsibility outlined for Remuneration Committees to justify severance payments and the importance of not rewarding failure.

• Contract Terms – Remuneration Committees should ensure that policy and objectives on directors’ contracts are clearly stated in the Remuneration Report.

• Pensions – the importance of regular reviews by Remuneration Committees is outlined to ensure that these do not lead to unmerited payments in the event of severance.

• Executive commitment – Boards should ensure that executives show leadership by aligning their financial interests with those of the company.

For the full guidance see here.

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