Executive Pay

Chuka Umunna Excerpts

Monday 23rd January 2012 Commons Chamber

[Mr Chuka Umunna (Streatham) (Lab)]

(Urgent Question): Will the Secretary of State for Business, Innovation and Skills make a statement on the Government’s proposals on executive remuneration?

[The Secretary of State for Business, Innovation and Skills (Vince Cable)]

I welcome this opportunity to set out Government proposals on executive pay. Last September I published papers that explored the issues around the rapid growth in executive pay in our largest listed companies, and embarked on a call for evidence.

The evidence is clear that business and investors recognise that there is a disconnect between top pay and company performance, and that something must be done. We cannot continue to see chief executives’ pay rising at 13% a year while the performance of companies on the stock exchange languishes well behind, and we cannot accept top pay rising at five times the rate of average workers’ pay, as it did last year. It is not Government’s role to micro-manage company pay, but there are things we can do to address what is a clear market failure.

Today I can announce a package of measures that the Government will take forward to tackle the issue on four fronts: greater transparency, so that what people are paid is clear and easily understood; more shareholder powers, such as the introduction of binding votes, so that shareholders can hold companies to account; more diverse boards and remuneration committees; and best practice led by the business and investor community. No proposal on its own is a magic bullet, but together they can enable a major transformation to get under way.

Let me start with transparency. Shareholders have told us that they need clearer and more relevant information about pay, particularly the link to performance. At present many company pay reports are simply impenetrable. Through secondary legislation later this year the Government will require companies to publish more informative remuneration reports on how executives are rewarded. This will start with reports being split into two sections: one detailing proposed future policy for executive pay, and the other setting out how pay policy has been implemented in the previous year.

On future policy, remuneration committees will be expected to explain why they have used specific benchmarks and how they have taken into account employee earnings, including pay differentials, when setting pay. Companies will also have to explain how they have consulted employees and taken their views into account. UK employees in large companies already have the right to request that their employers consult them on issues relating to the organisation, including pay, through the Information and Consultation of Employees Regulations 2004. This potentially powerful mechanism for employees has been underutilised to date, so I encourage employees to use it and put executive pay on the agenda.

Shareholders say that pay policy too often appears totally disconnected from their company’s overall strategy. I want companies to state clearly and succinctly how their proposed pay policy reflects and supports company strategy, how performance will be assessed and how it will translate into rewards under different scenarios. In the backwards-looking section of the report, companies will have to provide a single figure for total pay for each director and explain how pay awards relate to the company’s performance. To provide context, companies will be mandated to produce a distribution statement outlining how executive pay compares with other disbursals, such as dividends, business investment, taxation and general staffing costs.

Alongside more information, shareholders need new powers to hold the board to account. I will consult shortly on specific proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards. This will include a binding vote on future pay policy, including details of how performance will be judged and real numbers on the potential payouts directors could receive. Companies will have to include a statement on how they have taken into account shareholder views and the results of previous votes.

There will also be a binding vote on any director’s notice period longer than one year and on exit payments of more than one year’s salary. Shareholders will still get a vote on how the agreed policy has been implemented. I will consider whether we need further sanctions that could be applied when a significant number of shareholders dissented in the advisory vote. In addition, we will review what level of shareholder support is needed to pass pay proposals—for example, whether the threshold for a successful vote should be raised to 75% of share votes cast. By way of context, last year four FTSE 100 companies failed that test.

Let me move on to diversity in remuneration committees. Having diverse remuneration committee membership is crucial to changing the status quo on executive pay. The right way to tackle this is by having more diverse boards. I want to see more people who come from different backgrounds appointed, including people from the professions, public servants, academics, lawyers, and people who have not been directors before. For example, I would like at least two board members to have never previously been members of a board of directors.

In October a new provision in the UK corporate governance code will come into force requiring companies to report on their policy on boardroom diversity, how they propose to deliver it and what progress has been made. That sits alongside a new code of conduct for executive head-hunters and good practice guidance from the Association of British Insurers on the importance of board diversity, board evaluation and succession planning. The Government will also address fundamental conflicts of interest in the pay-setting process and require greater transparency on the role of remuneration consultants, how they are appointed, their fees, and who they advise and report to.

We have also observed that in the FTSE 350 about 6% of remuneration committee members are executives of other companies. There is a perceived conflict, as those individuals have a personal interest in maintaining the status quo in pay-setting culture and in pay levels, and we are looking at mechanisms to limit that.

In the context of such changes, we must deal with the specific issue of payments for failure. Some of our consultees have argued that all quoted companies, not just those in financial services, should have a clawback mechanism in place, and we will ask the Financial Reporting Council to revise the corporate governance code in order to require all large public companies to adopt clawbacks.

In relation to best practice, this package of measures will create a more robust framework within which executive pay is set and agreed. Moreover, lasting reform depends on active shareholders and responsible businesses accepting the need for change and pushing the agenda forward.

Deborah Hargreaves, who chairs the High Pay Commission, will launch a new project next week to monitor the state of pay at the top. The high pay centre will perform an important role in delivering the high-quality research that this area of debate badly needs. Companies have to show leadership on this issue, and in the following weeks and months I will be working with business and investor groups to build on the current momentum for reform, to agree on what best practice looks like, and to promote that more widely.

[Mr Speaker]

Order. I am extraordinarily grateful—[Interruption.] Order. I am extraordinary grateful to the Secretary of State, but I have been immensely—perhaps excessively—generous, because the right hon. Gentleman took precisely three times as long as he is supposed to take in answering an urgent question. I know he will understand—I listened to him with great interest and respect—that I must make allowance for that with regard to the Opposition Front Bencher’s response, but above all I make the point for the future that those on the Front Benches must stick to the limit, because my concern is to protect the rights of Back-Bench Members.

[Mr Umunna]

Thank you, Mr Speaker, for forcing the Secretary of State to come to the House today to set out the Government’s proposals in this area—[Interruption.] The Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey) chunters from a sedentary position, but it is quite extraordinary for Ministers to demand greater accountability and transparency from people in business, and then to seek to avoid being held to account for their policies in that area in the House of Commons.

The problems of excessive executive pay and rewards for failure have grown over the past few decades; in fact it was probably 30 years ago, when the current Business Secretary was a happy and active member of the Labour party, that things were more in proportion. We agree that it is right that those who work hard, generate wealth and create jobs for our country are rewarded, but excessive pay and rewards for failure are bad for business, the economy and society at large.

I welcome much of what the Business Secretary says, but his proposals simply do not go far enough in promoting the transparency, accountability and fairness that people want to see. We support all the recommendations of the independent High Pay Commission, to which the Business Secretary referred, but why will he not do the same, particularly given that his Treasury spokesperson in the Lords is a member of the commission, and presumably supports its recommendations?

The Business Secretary and other Ministers have underlined the importance of consulting employees, so why will he not back moves for employees to sit on the remuneration committees that set pay? Employees play that type of role in Europe’s strongest economy, Germany, and on the board of one of our most successful businesses, John Lewis. We read that he would like to back the proposal but has been prevented from doing so by the Prime Minister and the Chancellor. Can he confirm that?

The right hon. Gentleman said nothing about the publication of pay ratios within businesses. Why will he not agree to that proposal? If I am wrong, I am happy to be corrected. I agree with him on the need for greater clarity about the role of remuneration consultants. They currently owe their duty to the board, as I understand it. Does he agree that there is a case for changing the situation so that, much like auditors, they owe their duty to shareholders?

Above all, I do agree that increased shareholder activism is key. Two issues have been cited as obstacles: that more of our UK stock is held by foreign investors and that it is held for a shorter period. Does the right hon. Gentleman agree that that need not be an insurmountable barrier to increased shareholder activism?

Finally, on shareholder activism, the Business Secretary, the Deputy Prime Minister and other Ministers who ultimately bear responsibility and control the public stake in the banks—RBS, in particular—have said that they are in a position to stop the chief executive of that bank receiving a large bonus while he is issuing thousands of redundancy notices to RBS employees. How and when will that happen? Does the right hon. Gentleman think that it is acceptable for the chief executive of RBS to take a bonus of the order of £1 million when thousands of company employees are being made redundant?

[Vince Cable]

I start by acknowledging that the issue is, as some of the hon. Gentleman’s questions implied, complex. The best way to proceed with it for the country is to have an all-party consensus. The contributions made in recent weeks by the Prime Minister, the Deputy Prime Minister and the Leader of the Opposition have contributed in a very positive way towards that, and we can make some progress on that. I contrast that slightly with the hon. Gentleman’s somewhat carping response. I believe that today he put out a press release describing as “half-baked” proposals that he had not seen; he did not know what was coming. That was not terribly clever.

The hon. Gentleman’s central criticism was that we had not gone far enough. Let me reflect on what that means. We have emerged from 12 years of Labour government, when many of the issues could have been dealt with. That period of government started with something called the “prawn cocktail offensive”, which led to my immediate Labour predecessor saying that he was “intensely relaxed about people being filthy rich”. Those were the standards that we inherited. I remind the hon. Gentleman about what happened in that period of government. At the beginning, chief executives’ pay was 47 times average pay; at the end, it was 120 times average pay. That is the problem that we are now trying to correct. Before the hon. Gentleman lectures me any further on not going far enough, he should reflect on why so little was done when his party had the power to do it.

Let me respond specifically to the point about workers on boards. It would be very desirable if there were more workers on boards. The initiatives being promoted in respect of encouraging John Lewis-type arrangements, which by definition will get workers on boards, will take that further. We welcome worker participation in industry; that is one of the reasons why my ministerial colleague, in conducting the Royal Mail legislation through Parliament, laid such insistence on worker shareholding and giving workers a right to participate. But there is a specific set of problems around mandating companies to have workers on their boards. Consider the position of the large number of FTSE companies whose employees are predominantly overseas. How would the work force be selected? Worker participation is a good idea for many companies, but let it be done without the prescriptive route, which would simply not work.

The same applies to pay ratios. There is a lot to be said for pay ratios; the hon. Gentleman may not have heard me, but I did advocate that kind of metric as a way of assessing what is happening. But if he had reflected for a few minutes, he would have seen that there is a big difference between a company that, for example, has a large number of unskilled workers, and another company that has outsourced a lot of its unskilled labour force, producing totally meaningless figures in respect of ratios. So we welcome pay ratios, but they should not be mandated and prescribed.

The hon. Gentleman asked about the High Pay Commission, which has done excellent work; I referred to it during my contribution. I checked back on its 12 recommendations, and we are implementing 10 of them in practice or in spirit. Of the remaining two, one—about employees on boards—I have already referred to. The other was a very specific recommendation on the structure of pay, which we judged to be impractical.

On RBS, let me just say that that matter is above my pay grade. The Prime Minister has said that he will ensure that it is dealt with properly. I am sure that it will be, and that there will not be excessive bonuses.

To return to my first point, we can make progress in this important area on an all-party basis. I encourage the hon. Gentleman to revert to his usual more constructive and moderate approach, and to work with us to achieve far-reaching and overdue reforms.