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Diageo praised for not supporting pay to fail'

Published:  23 July, 2008

by Ron Emler
Diageo has been praised by investment institutions for its attitude to severance pay.

A recent report revealed that more than half of Britain's top 100 companies are paying their chief executives more than 1 million a year. This has not only fuelled debate about the rapidly accelerating disparity between directors' earnings compared with average earnings, but has also highlighted the increasing tendency for boardroom pay to contain large bonuses, especially when investors complain that performance targets are low and opaque, with shareholders having little influence.

It has become common practice for companies to pay these bonuses even when an executive is dismissed for poor performance, but that will not be the case at Diageo. Buried on page 53 of its annual report, the company states: If the board determines that the executive has failed to perform his duties competently, the remuneration committee may exercise its discretion to reduce the termination payment on grounds of poor performance.' So, at least Diageo is setting a trend by promising to move away from the paid to fail' culture that has drawn so much attention to other companies.

City commentators and investors groups have welcomed this frankness and have underlined that while successful employees should be well remunerated, that principle should not be undermined by failures leaving a company with big bonuses.