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Executive contracts and severance Guidelines from ABI and NAPF

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

The statement, first published in 2002, assists companies with the design and application of contracts for when senior staff depart. It is also used by shareholders when assessing whether a situation exists where failure is being rewarded.

Peter Montagnon, the ABI's Director of Investment Affairs, said:

"The original statement has served us well. We are grateful for companies' responses, but we cannot afford to be complacent. 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."

NAPF Head of Corporate Governance, David Paterson, said:

"Disclosure standards on remuneration policy have improved markedly since this statement was first published, as has alignment between management and shareholder interests. The re-publication of the joint statement serves as a timely reminder of shareholders' expectations when directors are required to address the difficult question of severance terms."

The new Statement contains eight Principles, including:

· Notice Periods - encouragement is now given to boards to consider making directors' contracts with a shorter notice period than the standard 12 months.

· Severance Payments - responsibility outlined for Remuneration Committees to justify severance payments and the importance of not rewarding failure.

· Contract Terms - Remuneration Committees should ensure that policy and objectives on directors' contracts are clearly stated in the Remuneration Report.

· Pensions - the importance of regular reviews by Remuneration Committees is outlined to ensure that these do not lead to unmerited payments in the event of severance.

· Executive commitment - Boards should ensure that executives show leadership by aligning their financial interests with those of the company.

Last updated 01/07/2016