IoD knocks back Government ideas to curb excessive pay

The Institute of Directors has rejected most of the ideas put forward by Trade and Industry Secretary Patricia Hewitt to curb huge payouts to failed company executives.

In a submission to the DTI, the IoD says the idea of new legislation is "inappropriate", especially to limit directors' contracts to just one year. The IoD argues that this could perversely lead to higher basic salaries for directors. The organisation also dismisses the idea of giving company boards new powers to limit payments to underperforming directors. It says this would be "difficult, if not impossible" to introduce.

The DTI's proposal to phase compensation payments to sacked company directors is also rejected by the IoD. It warns that it is "not a panacea" and can "lead to disputes". The IoD says that the best way to curb the rewards for failure culture is through "transparency of reporting and shareholder involvement".

Ruth Lea, head of the IoD's policy unit, said: "We do believe that there is a problem with rewards for failure.

"It gives business a lousy press. Recent cases of shareholder activism have been very helpful. Our view is: let's see how effective these developments are before heavy-handed legislation is brought in." On the issue of reducing the length of directors' contracts, she said: "Chief executives are the figureheads of companies. We wouldn't want to get rid of them every three months."

Hermes, one of the UK's largest pension fund managers, has, however, urged the Government to introduce changes to make it easier to reduce the payoffs to failed company directors.

In its response to the DTI, the fund manager proposes setting up a "halfway house" between summary dismissal and giving a director notice. This would be reserved for underperforming executives.

In such cases, company remuneration committees would be able to dismiss a director with a shorter notice period.

However, Hermes also warns against the introduction of new laws to curb excess pay.