The paper, entitled "Rewards for Failure," comes in response to mounting protests against multi-million pound severance deals for directors who have presided over tumbling stock prices and large-scale job losses.

The paper considers two possible methods of tackling the problem: Changing guidelines on director pay and conditions, or amending the Companies Act, the main piece of legislation governing employment contracts.

Here are its main suggestions:

Guideline reforms

• Guidelines on pay and conditions could be changed so as to cut the standard notice period for directors to one year or less. This would reduce the size of the payoff given to departing chief executives.

• Companies could be encouraged to insert clauses into directors' contracts specifying the amount of compensation they would be entitled to in the event of early departure.

• Alternatively, compensation payments to departing directors could be staggered over a period of months, and reduced or stopped altogether when they find a new job.

Legal changes

• The Companies Act could be amended so as to oblige firms to make severance payments proportionate to the departing director's performance.

• The maximum length of time a director may work for a company without the consent of shareholders, currently set at five years, could be shortened.

• Companies could be barred from using rolling contracts - where the contract is renewed each day so that at any given time directors have a fixed notice period to serve - to get around limits on the length of time they may serve.

• Contractual agreements setting out severance terms could be declared invalid if they result in greater compensation than directors would be entitled to if they were simply paid up until the end of their notice period.

The government says it is keeping an open mind on whether the goal of reining in excessive pay can best be achieved through new guidelines or legislative changes.

However, it acknowledges that introducing a legal obligation for companies to make payoffs proportionate to performance would raise practical difficulties, as directors often step down for reasons unconnected with the fortunes of the company.

The government has asked businesses, shareholders, trade unions, and other interested parties to comment on its document by 30 September.

It will weigh up their responses before deciding on its next step.