London, Sept. 18 (Reuters): The country’s leading employers’ group has responded to growing criticism over ousted chief executives walking away with fat payoffs, urging firms to negotiate “failure payments” before hiring top staff.
Investors are furious that multi-million pound cheques have been handed to executives even as their overambitious expansion plans brought their companies to the brink of collapse.
A spate of recent examples include troubled insurance company Royal & Sun Alliance, whose chief executive Bob Mendelsohn was dropped last week with a payoff of more than £ 1 million.
In continental Europe, Ron Sommer, the fallen head of debt-ridden Deutsche Telekom, will get 11.6 million euros (£ 7.3 million) in severance pay.
The Confederation of British Industry employers’ group said on Wednesday once severance pay had been agreed in a contract, there was little that boards could do to send underperforming executives off empty-handed.
Many were hired in the boom years when companies looked long and hard to find talented leaders and ended up paying over too much. Many firms have now switched from lucrative three-year rolling contracts, swapping them for one-year deals.
“The argument is at the wrong end,” said Sir Nigel Rudd, chairman of UK glass maker Pilkington, who also heads the CBI’s Boardroom Issues Group set up earlier this year to focus on business reputation and corporate governance issues.
“We believe more emphasis should be put on the starting contracts for people and particularly spelling out what the terms are if it doesn’t work out,” he said.
The CBI also called for more clarity in executive pay, saying contract terms and conditions should be disclosed to major shareholders.
In a list of proposals to the government to help restore market confidence in the wake of US corporate scandals, the CBI argued against tough legislation.
It would be more effective for the government to promote best practices by reinforcing existing standards, rather than myriad rules, which would inhibit the competitiveness of British businesses.
“I would very much like to see this government understand that they have a greater responsibility to the public who elected them to ensure that the wealth-creating process of this country continues, and it is in danger of going down because of the burden of red tape and regulation,” CBI director general Digby Jones said.