Peter Montagnon of the Association of British

There are few issues that can exercise investors and the media more than the amount of money paid to company executives.

Obscene payments to executives as they are walking away from a disaster that has scorched shareholders tend to be the most controversial. Few Eircom shareholders would have supported its former chief executive, Alfie Kane, getting his €3.8 million pay-off considering the losses they were nursing.

Small shareholders can protest and kick up a fuss at the annual general meeting but by that time the money has been trousered and the enriched former executive is well out of earshot. Big shareholders have much more clout as Peter Montagnon, head of investment affairs at the Association of British Insurers (ABI), can testify.

The former Financial Times journalist, who was in Dublin recently to address the Society of Investment Analysts in Ireland (SIAI), could at one time vent his spleen about such injustices through his influential Lex column. He is now at the forefront of the latest manoeuvring by large institutional shareholders to make big business more accountable.

The ABI is a hugely influential body. It has more than 400 members who account for 97 per cent of all of the insurance business written in the UK. Its members invest the premiums collected from clients in the stock markets and collectively have controlling interests in 20 per cent of all companies quoted on the London Stock Exchange. When the ABI has a gripe, it can flex its muscles and make its presence felt in the boardroom of many of Britain's publicly quoted companies.

Earlier this year Montagnon warned that the ABI would be paying particular attention to pay deals to departing executives and its influence can be seen in the reduced lump sum and staggered payments doled out to former Amey's chief executive, Brian Staples.

The ABI together with the National Association of Pension Funds, another substantial shareholder, has pledged to end the culture where highly paid executives can be rewarded for failure. To tackle this problem, it is seeking to influence the initial contracts offered to top executives to ensure their terms do not guarantee a hefty pay-out when they leave, regardless of whether their term has been a success or failure.

"Severance payments are very difficult because if they are in the contract, if you are entitled to it, it is very difficult not to pay it. And it would be very irresponsible of shareholders to encourage companies to break their contractual arrangements. On the other hand, there are sometimes payments that are manifestly not deserved. What we are encouraging companies to do is to write the contract at the outset in such a way so that they wouldn't be embarrassed if they had to pay severance."

Montagnon admits that it is very difficult to persuade companies to do this. "They think they have got the right person for the job but it is unfortunately true that sometimes this doesn't work out and you do have to know what you would be confronted with in those circumstances. So we encourage companies to focus at the point of hire."

Shareholders have won some highly significant concessions when it comes to ensuring that companies do not pay over the odds. In the UK, shareholders now have the right to vote on the total remuneration packages paid to top executives at the a.g.m.

"We have some reservations about the way it was introduced because it is a vote on a report on what has happened and it is only an advisory vote on changes. We would prefer much more focus on the policy because it is much better to be able to express your opinion and influence on the company while it is still forming its remuneration policy so that nothing that happens is a surprise. This is very much the focus of our efforts. I think we have got the vote and are going to use it constructively and sensibly."

The ABI can now vote on the top executive's base salary, bonuses, pensions, severance payments and share options. It would like to take a more holistic view of executive pay policies and glimpse below the top-tier arrangements. "To get a proper handle on this you need to know what people are being paid at sub-board level. We also are quite anxious for companies not to be in a situation where they have got talented executives who won't join the board because they have to disclose their remunerations. We have pushed for some degree of disclosure because we don't want the bulk of it to slip below the surface and that we would only see the tip of what might look like a small iceberg."

Shareholders may be sending a warning about over-paying executives but few will quibble with robust pay packets for those who are delivering an impressive performance and a handsome return on their investment. Montagnon says that shareholders have to recognise that performance does make a big difference.

"If you are looking to hire somebody and one person is looking for £3 million and another £4 million for doing the job. You may be frightened of paying £4 million because it just sounds like too much and decide to hire the person for £3 million. If they turn out to be mediocre, you have wasted £3 million. But if the person who wants £4 million turns out to be a real star, then you have paid that extra million but my goodness you are getting an extra return. So it is wrong to say you should go for the lowest amount. You have got to go for a structure that does enable you to reward real talent."

In the wake of scandals such as Enron, he believes there is a risk that some boards may have lost the confidence to make that type of decision. "I think there is a risk in some cases that that might happen which would be a pity but that is not something they can use as an excuse to overpay. The remuneration committee has a very serious job to do to set the parameters to get this right."

Generally, he believes the remuneration paid to top executives in the UK and Ireland has been rising at a much higher rate than inflation. "You can't go on doing that forever without something snapping. We have been getting rather close to the level in Britain where the premium paid to top executives is pretty much at the limit."

The art to be mastered is to avoid paying for no performance and to avoid situations where the conflicts of interest on the board of directors, of which the chief executive is a member, ensure executive pay is not properly controlled. "The art of good governance means that you have the right checks and balances and a broad structure that makes for robust decisions without impairing the entrepreneurial flair. That is what you want. That is the ideal."

The ABI believes there is a need to raise the overall standards across Europe and believes there is a huge opportunity for the European Commission to do this.