CAIRN Energy has been warned by corporate governance watchdog Manifest that a £1.4 million payment to founder Sir Bill Gammell could be a "flash point" at its next annual investor meeting even after the Edinburgh oil explorer yesterday backed down on a separate £2.5m share award.
The Herald revealed last week that Cairn agreed the payments in the summer when Sir Bill stepped up from chief executive to non-executive chairman.
However, yesterday it bowed to investor pressure and pulled the share award ahead of a vote due later this month.
A spokesman said: "The chairman and the board have listened to the shareholders and have acted accordingly."
A 76-page document sent to shareholders in the start of 2012 detailing a $3.5 billion (£2.3bn) return of cash, showed that Sir Bill, a former Scotland rugby international, was offered a £3.5m incentive to seal the sale of a 40% stake in Cairn India to mining giant Vedanta Resources.
This was to be settled in the form of a £2.5m share award, with no performance conditions attached, and a £1m charitable donation.
Cairn backed down on the share award after investor pressure including a rare "red-top" alert from the Association of British Insurers.
In a stock exchange announcement, the company said it "noted the comments received from several institutional shareholders and their representative bodies in connection with the proposed share award in favour of Sir Bill Gammell".
It continued: "In the light of those comments and as recommended by the remuneration committee of the company, the board has determined that it will withdraw Resolution 2, which proposed approval of the share award, from consideration at the general meeting to be held on January 30, 2012, and consult further with shareholders on the matter."
However, Cairn made no mention of a separate £1.4m "termination payment" paid in lieu of notice when Sir Bill, who is 58, moved from being chief executive to chairman in June. He is likely to be on a far lower salary as chairman. Cairn has insisted the payment was contractual.
The company faces calls to justify the payout before investors are effectively asked to approve it in a vote on a pay report at its annual meeting in May.
Alan Brett, head of research at Manifest, said: "We will be keenly awaiting the explanation as to why they decided to make this payment. Shareholders' responses will be determined by the depth of explanation and whether they consider it to be satisfactory.
"In general terms the awarding of a loss of office payment to a chief executive who is becoming chairman is extremely unusual.
"It has the potential to be a flash point at the 2012 AGM."
It is rare for a payment to an executive to be withdrawn after it has been announced.
One of the few examples was the 2005 decision of Standard Life chief executive Sandy Crombie to give up £500,000 in bonuses and long-term incentive payments after market falls hit returns to the Edinburgh insurer's policyholders.
In 2010, the chief executives of Royal Bank of Scotland, Lloyds Banking Group and Barclays declined bonuses ahead of a company announcement while HSBC chief Michael Geoghegan gave his £4m bonus to charity.
This year Lloyds Banking Group chief executive Antonio Horta-Osorio said he would not accept a bonus for 2011 as he took several weeks' sickness leave.
The about-turn could lead to pressure on Cairn's remuneration committee chairman James Buckee, who has served on the board since 2009 after a career with the likes of Shell and BP.
He is expected to return to investors with a scaled-down version of the proposed award.
The news of successful investor pressure on Cairn comes as the Government plans to beef up shareholder power on pay by requiring 75% approval of a company's remuneration report.
Meanwhile, third-quarter results published by Cairn India showed that revenues to December 31 were broadly flat at 31bn Indian rupees (£396m), while earnings before interest, taxation and amortisation depreciation fell 7% to 24bn (£303m) Indian rupees.
Cairn's shares fell 10p, or 3.4%, to 282.2p.
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