No more rewards for failure, companies told

Institutional investors will today make it clear to companies that they will no longer tolerate giving big "rewards for failure" to outgoing executives.

The Association of British Insurers and the National Association of Pension Funds are to issue a combined code on how companies should deal with payoffs.

The initiative is being launched after the controversy over payments to former executives at the troubled telecoms company Marconi last year.

It also follows the private member's bill brought by Archie Norman, the MP and former chairman of Asda, to alter the Companies Act so that "golden goodbyes" would be outlawed.

The shareholder bodies, whose combined membership controls half of the stock market, have already made it clear they appreciate the difficulties faced by companies under the current law.

Any decision not to honour the terms of a departing director's contract - typically one year's salary, bonus and enhancement to pensions - can leave the company facing action for breach of contract.

However, investors have been encouraging companies to use negotiation when directors leave, to avoid making a hefty lump sum payment. Instead, the departing executive would receive a monthly payment until they secure alternative employment.

Such staggered payments were negotiated earlier this year in what was considered a landmark agreement with Rana Talwar, the former chief executive of banking group Standard Chartered.

In the past, shareholders have also expressed their dislike of contract terms that allow executives to receive payoffs when the companies they run are taken over.

In this situation, directors have been able to secure payment for two years instead of the now more acceptable practice of company directors having one-year contracts.