Demise of the mega-bonus? Cairn Energy boss stripped of £2.5 million

City analysts and the Association of British Insurers now hope other large companies will follow suit and withhold massive bonuses, amid anger over the hefty cheques received by executives.

Sir Bill had been due to receive the multi-million shares windfall as a reward for helping to bring about the company’s $5.5 billion (£3.5bn) sale of its Indian operations last year.

A week before shareholders were due to vote on the payment, Edinburgh-based Cairn said it had pulled the resolution in the wake of discussions with several institutions. It now plans further talks with shareholders.

Cairn shareholders had been asked to vote on a special one-off bonus in relation to the sale of the Indian operations.

In a statement, the company said: “Cairn … has noted the comments received from several institutional shareholders and their representative bodies in connection with the proposed share award.

“In the light of those comments … the board has determined that it will withdraw Resolution 2, which proposed approval of the share award.”

The move will be seen as a victory by shareholder groups. It comes a day after Business Secretary Vince Cable outlined plans to address the growing controversy over executive pay, including by offering company shareholders a binding vote on remuneration policies.

Cairn Energy’s share price fell by 3.35 per cent to close at 282.4p yesterday.

Tom Powdrill of Pensions Investment Research Council, an adviser to institutional investors on corporate governance and social responsibility issues, described Cairn’s decision as “huge”, adding that it was seen as a “test case” for other companies.

He said: “This could be regarded as a weather vane pointing to how things are going.

“You have got to remember that the company did try [to award the bonus] … but the fact they have backed off and have been challenged by the shareholders is indicative of the fact shareholders know they have to take a tougher line on pay.

“In the longer term, we have to hope that companies don’t try this in the first place. That’s the nut that has to be cracked.

“This decision is significant in that the shareholders have managed to stop them.

“This is a big, well-known company and this was seen in the corporate governance world as a test case as to whether this sort of thing can be tolerated. We are pleased that it has not.”

A spokesman for the Association of British Insurers said: “We certainly hope that all companies take a responsible attitude to remuneration. Companies are under more scrutiny than ever before.”

Earlier this month, Aberdeen Asset Management paid out a total of £11m in bonuses to senior fund managers. The package included £4m in cash and shares to chief executive Martin Gilbert, to be spread over the next four years.

Royal Bank of Scotland, majority-owned by the taxpayer, will announce its latest executive pay package shortly.

The bank said yesterday that no decision had been taken on the bonus to be awarded to chief executive Stephen Hester. Some reports have suggested Mr Hester is in line to pocket £1.6m on top of his salary.

Cairn Energy was founded by Sir Bill, a former Scotland rugby international, in 1980. He was chief executive from its stock market listing in 1988 until June last year, when he moved to become non-executive chairman. He was knighted in 2006 for services to industry in Scotland.

Explaining its original decision to award the shares, Cairn told shareholders that Sir Bill was involved in “extensive and rigorous negotiation” to bring about the Indian sale to Vedanta Resources.

As part of the incentive scheme, Cairn also planned to make a £1m donation to charities nominated by Sir Bill. He was entitled to receive £1.4m on stepping down as chief executive.

The India disposal is due to generate a return to shareholders worth $3.5bn (about £2.5bn), which will still be the subject of a vote next Monday.