ABI calls for end to takeover bonus bonanza

City investors yesterday launched a campaign against large payouts to directors whose firms are taken over and called for the payment of cash bonuses to be more closely linked to performance.

The initiative by the Association of British Insurers comes in the wake of controversy over a £15m payment to Michael Green, the ousted chairman of television firm Carlton.

The association is calling for more explanation from companies about why cash bonuses - which have been rising - are paid to executives and will look for an "appropriate link" to performance.

In the annual update of its guidelines on executive pay, the ABI, whose members control a quarter of the stock market, also made it clear that company chairmen's pay should not be linked to its share price if they want to be regarded as independent members of the board.

Peter Montagnon, the head of investment affairs at the association, said: "We have made some progress over the last year but shareholders need to be vigilant and to strike a careful balance.

"Listed companies have to compete with the private sector for executive talent, but as investors we also have to do what we can to preserve the integrity of the remuneration system. We cannot do that unless reward is linked to performance," Mr Montagnon said.

The payment to Mr Green sparked the introduction of these measures to discourage windfall payments on a "change of control".

Mr Green left Carlton with a £1.8m golden parachute and a further £13.2m from two share related schemes, some £7.1m of which vested after the merger between Carlton and Granada triggered a so-called change of control clause in the incentive package.

The ABI's new guidelines - which will be used as the basis for assessing pay deals in the coming year - require companies to make it clear when they design pay schemes how much directors would receive in the event of the firm being taken over. Any payment should reflect the underlying performance of the firm and not just a rise in the share prices following news of the takeover.

Mr Montagnon said that as cash bonuses had been increasing, shareholders wanted to be satisfied that there was a link between the payment and the performance.

He noted that the number of "amber top" alerts - not as severe a corporate governance warning as a "red top" - was rising, in part to reflect the rise in base pay at companies. The "amber tops" now cover 30% of the 677 companies the ABI tracked last year.

The ABI has also noted a sharp fall in the use of share options to motivate directors and a rise in long-term incentive plans, based on shares. The investor body is concerned that the use of these should not lead to an "unwarranted increase in overall remuneration levels".

Mr Montagnon also warned about the impact of a new EU directive that would make it compulsory for companies to have audit committees and have the knock-on effect of creating a legal definition of "director independence".

"By giving special responsibilities to the audit committee, the directive would undermine the concept of the unitary board, which has served the UK well," Mr Montagnon said.

European Union finance ministers in Brussels yesterday, however, brushed aside British misgivings and agreed that all listed companies, whatever their size, should set up statutory audit committees under planned legislation.

A draft EU directive, which is expected to be endorsed by mid-2005, aims to impose stricter rules for supervising auditors after corporate debacles in Holland and Italy such as Ahold and Parmalat - and to enforce their periodic rotation as well as safeguarding their independence.

Pay and display - The ABI's new rules and possible breaches

· Chairman should not receive share incentives geared to performance of the share price
David Arculus, chairman of telecoms group mmO2

· Greater transparency of bonuses
Sir Peter Davis, ousted chairman of J Sainsbury

· Companies should discourage windfall payments to executives when a company is taken over
Michael Green, chairman of Carlton

· Companies should accrue dividends on long-term incentive plans which would be paid to recipients once the shares vest
All quoted companies

· Companies should publish in advance their approach to adjusting performance hurdles after the introduction of new accounting standards, which could cause more volatile earnings
All quoted companies