Standard Life was forced to pay its former finance director Alison Reed a package worth over £1.6m after being sued by the former Marks & Spencer director last year, the insurer's annual report revealed yesterday.

Reed resigned suddenly in September 2006, barely two months after the group's flotation, with Standard refusing to confirm that she was entitled to any compensation, but Reed later said publicly she was taking legal action because she had been fired.

It now emerges that Reed, who arrived in June 2006 and was paid £492,000 for her 10 months in 2006, won a core settlement of £1.135m, a further £134,482 in lieu of a bonus for the first four months of 2007, and £97,500 towards her legal costs. She also has the right to keep free shares awarded under the company's long-term incentive plans in 2005 and 2006, and even a payment in lieu of an LTIP award for 2007, after she had left the company.

The company said: "Under the terms of the settlement reached with Alison Reed in respect of the termination of her employment, the remuneration committee exercised its discretion under the rules of the LTIP permitting her to retain the long-term incentive plan awards granted to her in 2005 and 2006, time pro-rated from the respective date of each award to April 30, 2007.

"She will also be eligible to receive a payment in April 2010 in lieu of being granted a 2007 LTIP award which will be time pro-rated to reflect the first four months of 2007 as a proportion of the award's three-year performance period."

That could mean a total of 125,000-plus shares currently worth more than £320,000 being added to the cost.

Asked about Reed's departure when news of the dispute emerged a year ago, chief executive Sandy Crombie said it was not a question of her "being paid off", that she had done a "fantastic job", and that it was not a "wrong appointment" - but that it was "better to have a clean break for everybody" once the decision had been made.

Reed, however, signalled that it had been "Sandy's choice".

Close observers at the time said Reed's departure had been prompted by personal tensions in the Standard boardroom over her management style, as well as by investor relations in the City, where her communication skills were said to be under scrutiny. She was replaced in November 2006 by David Nish, the former ScottishPower fnance director, on a salary of £475,000. Nish was also awarded 118,729 shares under the previous year's LTIP.

The report shows that total rewards to Standard's five executive directors, including LTIPs, shot up from £5.2m in 2006 to £8m in 2007, a year in which Standard's market value dropped by 16%. The company says its reward structure is already "designed to be aligned with the interests of our shareholders" - but nevertheless it has, without explanation, now adjusted both its bonus and LTIP schemes to link them more closely to share price performance.

Crombie, the group's 59-year-old chief executive who is at the centre of increasing speculation over when he will retire, received total pay and benefits of £1.64m, a rise of 5% on 2006. But he also received £670,000 in cash under an LTIP award for the years 2004-06, taking his total pay-out for the year to £2.31m - a rise of 48%.

His pension entitlement rose from £446,000 a year on retirement to £462,000 a year.

Crombie was topped, however, by Keith Skeoch, head of Standard Life Investments, whose total rewards including an LTIP payment came to £2.52m.

Trevor Matthews, who resigned in January as head of the UK business, saw his remuneration drop, somewhat inexplicably, from £1.29m to £1.01m. But as he resigned after the end of 2007, he retains his right to his 2007 bonus and his 2005-07 LTIP award. Matthews currently holds options over 559,565 shares, and is also by far the largest shareholder among last year's directors with a holding of 391,532 shares, against 297,710 for Crombie and 256,566 for Skeoch.

Standard's market value last year was hit partially by doubts over its strategic direction following the failed attempt to bid for closed life fund consolidator Resolution.

In the annual report, chairman Gerry Grimstone describes its 2007 share price performance as "disappointing", and goes on: "An important task for us now is to continue to communicate our vision for Standard Life and to encourage investors towards sharing our confidence in the future."