The federal government will curb golden handshakes and require companies to gain the approval of shareholders for termination payments of more than one year of an executive's base pay.
Treasurer Wayne Swan said the government would also initiate a Productivity Commission inquiry into executive pay, with former Australian Competition and Consumer Commission head Allan Fels appointed as associate commissioner.
"The government will curb golden handshakes in the form of excessive termination payments," Treasurer Wayne Swan said.
Mr Swan said shareholder approval will now be needed to approve all termination payments which are more than one year of an executive's base pay.
"The Rudd Government will amend the Corporations Act to significantly lower the threshold at which termination payments must be approved by shareholders from the current level down to one year's average base salary," Mr Swan said.
The previously level that required shareholder approval was when a termination payment reached up to seven times a director's total annual remuneration package.
"We have decided to have a Productivity Commission inquiry into the whole issue of executive pay," Mr Swan told reporters in Canberra.
"We have appointed Allan Fels as assistant commissioner to examine this matter."
Mr Swan said the community has been offended by the excessive golden handshakes in firms where directors and executives have been rewarded for poor company performance.
"If we don't have trust between executives, workers and the wider community we can not build a stronger economy for the future."
Nick Sherry, Minister for Corporate Governance, said the definition of termination benefits would be changed to cover all aspects of payment and rewards given at termination.
Senator Sherry cited former Oxiana Ltd chief Owen Hegarty as an example, saying Mr Hegarty's termination payment of $8.3 million, representing 642 per cent of his base salary, would have had difficulty in being passed had the proposed laws been in place.
The government said the changes, however, can not apply retrospectively, and today's announcement will not prevent existing contract on termination payments from proceeding.
The government is also extending the range of executives whose termination payments can be subject to shareholder approval, expanding to cover all those executives names in the company's remuneration report.
