There is nothing magical about 'rolling contracts'.

In fact, most employees work under them.

The concept of 'rolling contracts' is part of management consultants' gobbledegook, which has been latched on to by the press in highlighting some of the very high severance payments given to the departing directors of large companies.A 'rolling contract' is a contract which can be terminated by notice given at any time.

That, of course, is the kind of employment relationship under which most employees in the UK work.

The significance in relation to executive payments is not that the contract is 'rolling', but rather on the length of the notice period or of the fixed term.It is the length of the notice period which dictates any severance compensation paid to a departing employee.

Therefore, in the case of a senior executive who has, for example, a two-year notice period, the maximum compensation for termination of employment (apart from any unfair dismissal redundancy compensation) would be damages or pay in lieu of notice for two years' worth of salary and benefits.Less elevated employees have notice periods counted in weeks or, at best, up to three months.

The compensation payments are, accordingly, less.Some of the excitement caused by the press over executive termination payments has been in the aftermath of the Cadbury report, which indicated that notices or fixed terms in directors' service contracts were generally too high and should be reduced to about two years (maximum).

Some other institutions are pressing for a greater reduction in the length of notice periods or fixed terms - to even one year.The issue causing most concern has been a tendency for some large companies to pay dismissed directors their long notice periods in full, without making any reduction for mitigation of loss and accelerated receipt.

Cynics have suggested the reason for such an approach is to create a precedent that it will benefit those directors left behind - when it becomes their turn to leave.The matter is exacerbated by the fact that, in some cases, long notice periods have been honoured in full even though the company's results have been poor and the individual's personal performance has been unsatisfactory.

The comparison is that less senior employees would not be given such generous severance arrangements.From a shareholder's perspective, the honouring in full of, say, a three-year notice period without any reduction for mitigation of a director who is aged under 50 is likely to be open to criticism.

The concept of mitigation of loss is often misunderstood by boards and remuneration committees.

The common law principle is that a wrongly dismissed employee has an obligation to take reasonable steps to minimise his or her losses - eg to look for alternative employment.In practice, the courts allow a reasonable period of time (three to six months) for the dismissed executive to hold out for a job of the same status and carrying the same remuneration package.

However, after a period of time, the executive will be expected to lower his or her sights and accept a lesser status job carrying a lesser remuneration package.

This is an ongoing process.Angry shareholders may also wonder why a director, who has at least been partly responsible for the poor company results, is having his or her contract honoured in full.

It is not an unreasonable question for a shareholder to ask at an AGM why directors' contracts do not hav e some provision in them to allow for termination on shorter notice in the case of poor performance which is culpable but not so severe as to amount to gross negligence.The problem is that most directors' contracts do not have such provision and therefore the board feels that it has to honour the contract in full.Although most senior executives are either employed for a fixed term of two or three years, or for a notice period of similar duration, there are variants on these two formats.

If there really is such a thing as a 'rolling contract', it is one for a fixed term and at the end of each year a further one year is added to the term unless either party exercises the right to stop the automatic extension.In substance this is not really different from long notice periods - the culpability is not in the 'rolling' nature of such a contract but in the long period of the notice or fixed term (as extended).

Most directors are not employed on such a contract.There is, however, the other side of the coin.

Really top flight executive talent does not 'grow on trees' and if talented top executives are to be induced to join a company, they want some inducement to move and some protection in case 'the chemistry isn't right'.Perhaps the more appropriate way of dealing with this (quite legitimate) concern is to provide for a specific severance sum payable in prescribed situations - eg redundancy, sickness, or other reasons for dismissal which do not import some culpability on the part of the executive.Some executives' service contracts provide for termination payments except where a dismissal is for 'cause' - but then what constitutes 'cause' is very narrowly defined and does not really sweep up the non-performing executive.In the final analysis, a balance has to be struck between a contract which can be terminated without incurring massive liability for the company, and one which does provide a measure of security for the senior executive.

In the light of the Cadbury report and subsequent events the trend has moved towards reducing long notice periods.