Major shareholder organisations have demanded an end to big pay-offs for failed chief executives.

The Association for British Insurers (ABI) and the National Association of pension Funds (NAPF), whose members collectively own about half the shares traded on the London Stock Exchange, called for an end to the "payment for failure" culture.

Peter Montagnon, head of investment affairs at the Association of British Insurers, said: "Extravagant pay-offs are highly damaging to the reputation of companies which sanction them as well as being costly to shareholders.

"One point we want to make is we want to pay handsomely for success but can only justify that if we don't end up paying for failure."

It was easy to tell when an executive had failed from a poor implemented strategy.

He said: "There is a lot of reward already for the kind of risk executives are taking. We do want to encourage good people to run successful companies but that doesn't mean paying them when they haven't managed to do so."

Boards which wrote up the initial contracts should examine what the costs would be in the event of failure and make sure it was not excessive.

The ABI and NAPF said they were setting out a statement of best practice on executive contracts and severance, calling on companies to ensure they did not write contracts that committed them to pay for failure.

The organisations recommended severance payments should be made on a phased basis rather than in one lump sum and called on boards to disclose and justify pension enhancement.

Christine Farnish, chief executive of the NAPF, said: "The key for boards is to get the contract terms right at the outset."

Controversial cheques written in the past include former Marconi boss Lord Simpson's £300,000 pay-off.