ABI and NAPF update guidelines on executive contracts and severance

The Association of British Insurers (ABI) and National Association of Pension Funds (NAPF) have updated their joint statement on executive contracts and severance.

The new statement contains eight principles to assist employers with the design and application of contracts when senior staff depart. It can also be used by shareholders to decide if a situation exists where failure is being rewarded.

The statement also includes a section on notice periods, which encourages boards to consider making directors’ contracts with a shorter notice period than the standard 12 months. In addition, it outlines the responsibility for remuneration committees to justify severance payments and stresses the importance of not rewarding failure.

Where pensions are concerned, the statement highlights the importance of regular reviews by remuneration committees to ensure unmerited payments are not made in the the event of severance.

It also states that directors’ contracts should be clearly stated in remuneration reports, while boards should ensure executives show leadership by aligning their own financial interests with the overall strategy of their company.

The original statement was published in 2002. Peter Montagnon, director of investment affairs at the ABI, explained that a revision was necessary to avoid complacency. “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.”

David Paterson, head of corporate governance, at the NAPF, added: “The re-publication of the joint statement serves as a timely reminder of shareholder’s expectations when directors are required to address the difficult question of severance terms.”