Introduction of a Maximum Wage

Iain McKenzie Excerpts

Tuesday 10th February 2015 Westminster Hall

[Mr Iain McKenzie (Inverclyde) (Lab)]

It is a pleasure to serve under your chairmanship again, Mr Streeter. I am pleased to have secured this debate, because in these continuing and challenging times financially, when austerity is still biting from the deepest recession we have known, it is fitting that we should look at fairness of wage. In these difficult times, we see many struggling, including hard-working families, with the cost of living crisis across the UK today. That is why I want to focus on one of the obstacles to fairness: the pay gap between the bosses of Britain’s biggest companies and their average employees, which has become even greater over the past couple of years.

I cite analysis by the High Pay Centre think-tank, which revealed that in 2013 the average FTSE 100 chief executive officer received remuneration worth 143 times that of the average employee in their firm. Previously, the average ratio was 47 times. That analysis provides examples of excessive pay gaps. At Associated British Foods, which owns Primark, the gap between the pay of the chief executive and the average worker’s salary was 361 times. In the hospitality conglomerate Whitbread, the gap was 415 times. The Next boss was awarded pay worth 459 times that of the average employee—although I should add that, to his credit, he distributed his bonus to the staff. Worst of all was the pay gap at the media company WPP, where the chief executive officer took home a pay package nearly 800 times bigger than his employees’.

That is why people say we need a maximum wage to complement the minimum wage. What people are now identifying with is the need for maximum pay ratios within companies and across sectors to put an end to chief executive officers getting paid many hundred times what their average-earning staff are paid. The reason people are so upset at these figures is that rising wage disparities are one of the key drivers of inequality. We need to tame extremely high levels of pay among executives, because it is one of the factors that has encouraged risk-taking behaviour, leading to crisis, and it has often been found to hinder, not aid, the overall productivity of a company.

Capping excessive pay is not anti-business. There is nothing pro-business about letting a small group of chief executive officers take far larger rewards than their shareholders or staff. If anything, it is the executive pay racket that is anti-business. Some may choose to argue for the enforced pay ratio on practical or economic grounds. Mine is unashamedly a moral position: it is fundamentally unfair for the pay gap to be so wide. History has taught us that our society fares worst when there is such a gap between our rich and poor. Today, that gap has never been wider. We know that rising income inequality is shaped by the increasing concentration of income at the top end of the income distribution, and a likely cause in the UK is simply that leading executives and those who are head-hunted demand bigger and bigger salary packages.

Salary packages are listed in the “Name and shame” list for Fat Cat Tuesday, which is the name that the High Pay Centre has given to the first Tuesday in January, which this year was 6 January. Believe it or not, by 6 January this year, bosses of Britain’s biggest companies had already made more money in 2015 than most workers in the country will earn in the entire year. Surely that, more than anything, highlights the problem of unfair pay ratios in the UK.

The High Pay Centre calculated that the average FTSE 100 chief executive was paid the equivalent of nearly £1,200 an hour, based on earnings calculated in the previous year, meaning that the average CEO can earn more in two days than the average employee earns in a whole year. The huge hourly rate even assumes that FTSE bosses work three out of four weekends, work 12-hour days, and take fewer than 10 days’ holiday a year. For top bosses to rake in more in two days than their staff earn in a year is clearly unfair at any time, but in these difficult times it is a downright insult and a financial racket if ever we saw one.

[Mr Jim Cunningham (Coventry South) (Lab)]

Has my hon. Friend noticed that there seems to be a trend in this country, particularly at executive level, for rewarding failure? We have seen a number of cases in the past. More importantly, although the Prime Minister is now calling for pay increases, saying that inflation is at about 0.5%, the reality is that the purchasing power of wages has dropped by about 6%, so there is a long way to go to catch up. I notice too that what the Prime Minister is talking about is voluntary, and he is talking about the private sector, not the public sector. We have poverty wages and employers being subsidised by the benefits system. What does my hon. Friend think about that?

[Mr McKenzie]

My hon. Friend makes some very good and poignant points. We have seen several chief executives walk away from failure—abject failure—with handsome salaries and even handsome bonuses. It is difficult in these times, with the cost of living crisis, for hard-working people to stretch their budgets. We are seeing a decrease in real spend for them, and their income is being supplemented by the benefits system. That is probably why the cost of welfare is rising year on year.

What we have seen over the past couple of years is that, although chief executive officers’ pay went up by 73%, the FTSE hardly moved. It is still no higher than it was a decade ago and it is impossible to argue that FTSE companies are twice as well run as they were a decade ago or that bosses are twice as important as the workers. In fact, executive pay has become, as I said, a kind of racket, with a small club of non-executives voting themselves huge pay rises and ignoring their shareholders.

So what does this unfairness look like? The average UK salary was £27,000 in 2013. It rose to £27,200 in 2014, an increase of only £200. At the same time, the average pay for a CEO rose by almost £500,000, and the average CEO was taking home £4.72 million. All this is happening against a backdrop of austerity, zero-hours contracts and increasing visits to food banks throughout the country. Alarmingly, more than a third of UK workers on the minimum wage cannot even afford to shop where they work. Estimates of the number of people employed on zero-hours contracts are said to be in the region of 622,000 up and down the country.

Is the wage gap just our problem? No, because last November, 66% of Swiss voters rejected an initiative that would have capped the compensation of a company’s top executives at 12 times the wage of its lowest-paid workers. I accept, and I could envisage, that a cap that low might equally be rejected across the United Kingdom; but that does not mean that something less severe and more thoughtfully crafted could not work. Limiting a chief executive officer’s pay to, say, 100 times the minimum wage would still allow top executives to be handsomely rewarded.

However—here is the best part—if the chief executive officers wanted a pay increase, they may be more willing to throw their weight behind a campaign to boost the minimum wage. As was pointed out by the Swiss politicians who debated this in 2013, this level of unfairness can damage the social fabric and indeed democracy itself. Put quite simply, any economic model that does not properly address inequality will eventually face a crisis, harming long-term economic growth and welfare. Concern about the gap between the super-rich and everyone else has reached its highest ever level, contributing to a wider anger and the perception of a self-serving elite.

[Mr Jim Cunningham]

We have had a recent example of this issue with Citylink. At least 1,000 drivers were contracted to that company and could not work for anyone else. They are still waiting to be paid. More importantly, they do not qualify for redundancy pay. That is the level to which employment legislation has taken people. My hon. Friend mentions democracy and fairness; does he agree that things are becoming more and more unfair for people in the workplace?

[Mr McKenzie]

I wholeheartedly agree with my hon. Friend. I will go on to indicate some ideas that could be added to that of a maximum wage to assist people in the workplace.

As I said, 80% of the public are said to support Government action to reduce the gap between the high and the low and middle-income earners. Growing differences in pay are neither fair nor proportionate, producing widening income discrepancies in Britain. When bosses make hundreds of times as much money as the rest of the work force, it creates a deep sense of unfairness. Income inequality is a threat to the economy. I predict dire consequences if the worsening gap remains unchecked. Britain’s executives have not got that much better over the past couple of years. The Government need to take more radical action on top pay to deliver a fair economy that ordinary people can have faith in.

What can be done? The minimum wage was recently voted the most successful Government policy of the past 30 years by members of the Political Studies Association. Could a maximum wage prove equally popular? I believe the time has come for the idea to be seriously debated. It is worth noting that a maximum wage can be set one of two ways. There could be a straightforward maximum, so that no one can earn more than a set sum—for example, £1 million—either set in legislation or enforced through a 100% tax rate kicking in at the chosen point, to make sure that it is the top income. Alternatively, there could be a maximum pay ratio, so an employee in an organisation cannot earn more than x times what the lowest or the average paid employee earns.

The average pay of a FTSE 100 chief executive officer has rocketed from around £1 million a year in the late 1990s, which was about 60 times the pay for the average UK worker, to closer to £5 million today, which is more than 170 times the average worker’s pay. The idea of a maximum wage in difficult times is not new. During the second world war, President Roosevelt issued an executive order limiting corporate salaries to no more than $25,000 per year. FDR believed that if men were putting their lives on the line for just $60 per month, the rich should be required to make some sacrifice, too.

Perhaps we should not employ such a rigid cap to tackle corporate excess, but instead raise the idea of a maximum pay ratio, so that the highest paid employee of an organisation would not be allowed to earn more than a fixed multiple of the amount earned by lowest paid. That would undoubtedly be a radical step, but would a democratically enacted maximum pay ratio of, for example, 75:1 really be that extreme in a society that uses zero-hours contracts and relies on food banks?

Around 80% of the public support a requirement for executive pay to be tied to the pay of the average-paid employee. Some forward-looking organisations already operate such a policy unilaterally; for example, John Lewis has capped the ratio at 75:1 and the TSB at 65:1. Pay for top executives increased from £4.1 million to £4.7 million between 2012 and 2013, and inequality is predicted to rise in the coming years. The Government’s tinkering with shareholder scrutiny has had little effect, so it is time to contemplate bigger reforms, and pay ratios could be part of those. Worker representation on company boards should also have a role to play, and taxation and profit sharing are further important mechanisms.

What of the Government’s actions so far? The Business Secretary has imposed new accounting regulations requiring quoted companies to produce a “single figure” for the remuneration of directors in annual reports. That figure includes base salary, bonuses and share-based awards in any long-term incentive plan. That is a start. In stark contrast, however, the Chancellor challenged the EU cap on bankers’ bonuses in the courts.

Apologists for the pay gap often argue that high pay is needed for high performance, yet we do not seem to expect generals, admirals, senior civil servants or indeed Prime Ministers—let alone nurses or teachers—to require millions of pounds a year to perform well. If we believe the performance-related argument, it would seem to suggest that businessmen are, almost uniquely among high fliers, incapable of being motivated by anything but money. Research shows that growth in executive pay, bonuses and incentive payments has vastly outpaced performance as measured by every indicator in common use.

Another argument in defence of high salaries is that the money trickles down to the rest of us. Trickle-down is a fundamental building block of supply-side economic theory, which has been the tool of choice in the past few decades. Yet it is generally accepted that it did not work in Thatcher’s Britain, and in fact had negative effects. In a recent report, the OECD rejects trickle-down economics, noting the

“sizeable and statistically significant negative impact”

of income inequality.

Small businesses are hit by taxes and business rates, while big business turns around and says to the state, “This is how much tax I fancy paying this year—take it or leave it.” If we take zero-hours contracts as an example, it is clear that the more unequal we become as a society, the faster the earnings of those at the top race away from those of the people at the bottom. Wealth inequality in the USA was at its highest levels historically in 1928 and 2007, one year before each of its two biggest financial crises. The International Monetary Fund has observed—and this is its view—that countries with more income inequality see their economies more frequently plunged into deeper recessions, and that economic growth lasts much longer in more equal societies.

Let us look at the so-called shareholder spring of 2012. A series of big revolts were recorded against ludicrous packages, which seem to have had some effect, for a while. But what more can shareholders do? They need to keep on making their voices heard at annual general meetings, to question and press for more substantial cuts in CEO pay. Companies such as Shell have cut CEO pay; if a company of the complexity of Shell can cut it, it is hard to understand why others cannot do the same.

The widening gap between rich and poor in this country can only be detrimental to our society. What is called for is fairness in remuneration between the top earners and CEOs and those on average salaries in organisations. A capped ratio should be considered in these difficult times. I warn everyone, most especially the Government, to mind the gap.

[Jim Shannon (Strangford) (DUP)]

I apologise to the hon. Member for Inverclyde (Mr McKenzie) for not being here at the start of the debate—I was at a Bill Committee that I am serving on. I am conscious that that Committee will have several votes. I apologise to the shadow Minister and Minister because I will have to leave early, if they do not mind.

I am privileged to contribute to this debate on a maximum wage. I will try to strike a balance between the need to bring up the wages of those on poor pay and the need for those on very high pay to consider those further down the ladder, so to speak. The issue is very sensitive. At a time when many people are struggling to make ends meet, find employment or put food on the table, sections of society are earning disproportionately large and astounding sums of money. We have seen the rise of the slogan “We are the 99%” and much theorising about how much the 1% earns, but we must be careful about how we handle this issue. We should proceed with empathy and tact.

The Prime Minister said on TV and in the papers today that we must encourage businesses to give their workers more money. It is good that we are having this debate, because it enables us to focus on the important things. We need to consider what benefit a national maximum wage would have for our social capital. It will make more people feel that they live in an economically just society and help to create a more equal society. However, there is no point in narrowing the gap between the highest and lowest earners if the wages of the lowest earners do not increase. That is what we have to do, and that is the thrust of what the hon. Gentleman said.

Nobody in this Chamber would argue that the gap between our highest and lowest earners is not vast and that it does not have to be addressed. However, we must balance fairness and competitiveness, and take into account the potential spill-over effects of moving towards a maximum wage. We need to minimise economic harm, while healing our social fabric.

The highest earners in our society are often those in charge of large corporations. They are the CEOs of companies that create jobs and contribute to growth, and we commend them for that. When we decide on a cap, it should not penalise those individuals. However, we cannot put on the back burner the fact that the disparity in earnings is UK-wide, and that its prevalence across the globe makes the global wage gap positively monumental.

Income inequalities have been increasing in the short term and the long term, and have been aggravated at both ends of the pay scale. I do not mean that the rich have become poorer in correlation with the decrease in pay of the poorest; rather, the poorest have fallen further behind the average, while the richest have moved further ahead. That is not a criticism of those who earn lots of money, but that gap has to be addressed and I hope that this debate will be a way of doing that.

When we think about introducing a maximum wage, we must consider many issues. First, we need to take into account the regional differences in the cost of living in the United Kingdom of Great Britain and Northern Ireland. Secondly, we must address the critical issue of how to deal with pensions in the private sector. The biggest issue is that we must show that we are not against innovators, strivers and those who create jobs. Job creation helps the economy to grow, provides wages to individuals and helps their local areas to thrive. There is a wider social issue to be addressed, which is eating away at the social fabric of our society. We should not shy away from the challenges of opening such a debate. Undoubtedly, it will be difficult to harmonise everything at stake, but that does not mean that we should not make an effort to do so.

It is of great concern that the public perception of corporate executive wages has become so intense that they have been labelled “institutionalised robbery”. It is hard to argue that there is not something unsettling about the disparity between executive pay packages and average wages. Regardless of the hard work of executives in running companies or corporations, it is difficult to justify the fact that some chief executives receive more than £6 million while their employees live hand to mouth in minimum wage jobs.

There is also the issue of performance-based bonuses, which affects the banks in particular. We have seen the general public in a frenzy about the fact that those they see as most visibly to blame for the economic crisis are being rewarded, while their own wages are either being pushed down further or do not exist due to redundancy. The fact that more directors are choosing not to accept their bonuses signals that there is a sense among the highest paid that the gap has become too big. I congratulate those at the higher levels of companies who have refused to accept their bonuses.

To reiterate, the proposal is to put a cap on the maximum wage that can be paid to a person in any one year, as the hon. Gentleman said. It is important that we address this issue. There are various means by which we could do that—perhaps through proportionality. It does not have to be arbitrarily about fundamental equality; it can be about increasing fairness and narrowing the gap.

[Mr McKenzie]

Does the hon. Gentleman agree that it is abhorrent that millionaires, if not billionaires, are running large enterprises on the back of zero-hours contracts for their staff? In these days of austerity and food banks, they are running empires on zero-hours contracts.

[Jim Shannon]

The hon. Gentleman is right. Everybody in this Chamber is concerned about zero-hours contracts and the many other disparities that need to be addressed. I thank the hon. Gentleman for his intervention, for securing this debate and for giving us the chance to make our comments.

Although I support the principle of a maximum wage, I have concerns about how we would introduce one without its having a detrimental effect on our competitiveness. We must ensure that we raise wages in a way that enables companies to progress. I believe that that can happen. We have seen some small changes in the past few weeks and months. It is important that we enable people to achieve as much as they can. We cannot allow a maximum wage to result in complacency about raising bottom-level wages.

The United Kingdom, and Northern Ireland in particular, must compete internationally. We need big businesses to draw in investment as well as the best and the brightest. We must create jobs by attracting people willing to set up corporations. The last thing we want is to deter those people on the basis of a superficial narrowing of inequality, so any reform must bring about substantive social and economic effects. It must increase the lowest wages in a company, or at least make earnings proportionate to the lowest earner in the corporation.

The hon. Gentleman said that the average FTSE 100 chief executive officer is now paid 143 times as much as their average employee. In 1998—that does not seem so long ago for those of us of a certain vintage—the average was only 47:1. The increase from 47:1 to 143:1 in 17 years has resulted in a massive disparity. Average wages are not increasing, even in companies run by CEOs earning 143 times their employees’ wages. Those companies evidently have money in excess, but still there has been little or no change in average wages, and there is only a marginal chance that they will increase.

Last October, the Business Secretary granted powers that were supposed to require a firm’s remuneration to its executives to have the support of 50% of its shareholders. However, they failed to cap the maximum salaries going to executives, and they did not prevent the pay of the average FTSE 100 chief executive from increasing by £600,000 between 2012 and 2014. In contrast, figures from the Office for National Statistics show that the average pay in the UK is £26,500. A worker in a full-time job earning the hourly minimum wage of £6.31 would get an annual salary of just £13,124. I believe, as the Prime Minister said today, that we need change. We need business to pay more to those at the lower wage levels.

I am curious about why, in the space of less than two decades, such a monumental rise has occurred. It is not surprising that the everyday worker is discontented and looking for us to take action. That is why this debate is being held. The High Pay Centre has called for a debate on more radical measures to address the widening income discrepancy in the United Kingdom.

[Mr McKenzie]

The hon. Gentleman asked why the difference has increased so much in the past decade or so. Could it be that there is a bidding war for chief executives, with each company bidding more to attract a chief executive to stay for a minimum number of years before they move on?

[Jim Shannon]

It is always hard to speculate on the reasons, but chief executive officers are much sought after—and yes, there does seem to be a bidding war. Unfortunately, in that bidding war those in the company who do the hard work and get their hands dirty are being left behind, and that greatly concerns me. At the very least, we need to acknowledge what is going on in order to open a discourse on solutions, whether they be the national maximum wage or an alternative.

In conclusion, I urge the Minister to consider the fact of inequality, shown by all the figures that we have heard and will hear in today’s debate. On top of that, when we consider a maximum wage to decrease the gap between the highest and lowest earners, we should also think about the prospect of decreasing the gap through bringing the bottom range up. I believe we have a duty to be compassionate and a responsibility to ensure that those in the bottom levels have their wages increased. Again, we must tread carefully. We have to address this social grievance and take it seriously, but we must also be ambitious in doing that in such a way that the United Kingdom of Great Britain and Northern Ireland is still seen as a place for fruitful investment and business prospects.

I thank the hon. Member for Inverclyde for bringing the matter forward for consideration. I apologise to you, Mr Streeter, to the shadow Minister and the Minister —my phone has been going like nothing ordinary; I am being summoned to vote in the Bill Committee. With your agreement, Mr Streeter, and that of the shadow Minister and Minister, I beg leave to retire.

--- Later in debate ---

[The Minister for Culture and the Digital Economy (Mr Edward Vaizey)]

It is a great honour to appear under your chairmanship, Mr Streeter. I thank the hon. Member for Inverclyde (Mr McKenzie) for calling this important debate. I am grateful for the contributions from the hon. Member for Strangford (Jim Shannon), who explained why he could not remain in his place, and the hon. Member for Coventry South (Mr Cunningham).

I congratulate the hon. Member for Hartlepool (Mr Wright) on his reasoned response on behalf of the Opposition. Of course, I cannot resist echoing the comments of his predecessor, Lord Mandelson, who said, while in government, that the Labour party was

“intensely relaxed about people becoming filthy rich”,

which perhaps provides some of the context for the debate. Indeed, those comments were echoed by the Labour party’s education spokesman, the hon. Member for Stoke-on-Trent Central (Tristram Hunt), who went on television on Sunday to talk about how the party was “aggressively pro-business”, because it may unwittingly have given the impression over the last few weeks that it is opposed to businesses and keen to burden them with regulations.

When Lord Mandelson was in government, the ratio of top pay to average employee pay increased from just 47:1 in 1998 to a peak of 151:1 in 2007. I am pleased to say that it had fallen back to 121:1 by 2013. That reflects the fact that the average total remuneration awarded to FTSE 100 CEOs fell by 5% in 2012 and by a further 7% in 2013.

Those cheap party political points aside, may I say that I have a lot of sympathy with the framework of this argument? We live in a civic society, and it is important people feel that they are part of a community, that they will be rewarded for the work they do and, just as importantly, that people are not remunerated for work in a way they perhaps do not deserve.

Philosophically, it is important to reflect on how public opinion views very high pay. For example, the football fans among us might not baulk too much at the pay of a top striker, defender or even manager in the premier league; indeed, some fans might say that any pay is possible, as long as the team gets the best person. However, that view is balanced by the fact that, to a certain extent, a footballer or other sportsperson has nowhere to hide; they are paid according to their performance on the pitch, and we can all assess that, so they are as vulnerable as anyone else to being dumped unceremoniously when their performance falls short. However, when we see some top executives being paid significant sums—or, even worse, leaving a job with a significant golden farewell—that sometimes impinges on our sense of fair play.

I say that because I am conscious of the fact that the Government have made efforts to reflect some of the public’s concerns. Indeed, the debate takes place against the background of significant allegations against HSBC about running a tax evasion operation. It also takes place on the day the Prime Minister has rightly sent out a message to chief executives that they should share the proceeds of growth and reflect in the wage packets of the people who work with them the fact that the economy is now growing.

[Mr McKenzie]

The Minister mentions the revelations about HSBC in the last few days. Is that not a prime example of people taking excessive risks in pursuit of that elusive excessive pay?

[Mr Vaizey]

I know only what I have read in the papers, so I hesitate to extrapolate too much from that case. However, if those allegations are proved correct, I hope the appropriate consequences do follow. It sometimes astonishes me that the behaviour of some companies—happily, they tend to be the exception rather than the rule—does not reflect their place in civic society.

Where and how should the Government intervene? The Government do not believe in blanket regulation of high pay through, say, a maximum wage. Companies and their shareholders need the flexibility to negotiate outcomes that work for them. However, we can force greater transparency on companies in terms of how they remunerate their top executives, and we can also give those who invest in such companies the power to demand simpler, more long-term pay structures—the long term has been mentioned in a number of contributions.

We have acknowledged that directors’ pay has gone up in recent years, while the link to companies’ performance and the wages of those who work in those companies has grown weak. I repeat that that damages the long-term interests of business, and it is right that we see that as a market failure and address it.

The Government’s reforms have been alluded to. The tone suggested that they were good first steps, but that they perhaps did not go far enough. Let me set out exactly what we have done. The new regulations came into force in October 2013. They create a more robust framework for the setting and reporting of directors’ pay. They have boosted transparency so that what people are paid is clearer and easily understood. They have also given shareholders the power to hold companies to account by calling for binding votes. We want to restore a stronger, clearer link between pay and performance and to address the culture of reward for failure.

Our reforms require companies to report the ratio of the average percentage change in employee pay to the percentage change in the chief executive’s pay. That should allow shareholders to understand whether pay increases apply proportionately to all employees or only to those at the top. Our reforms also mean that companies must report on how the pay and conditions of employees inform directors’ pay, whether companies have sought the views of their work force and, if so, how those views were sought.

We are monitoring the impact of our reforms. Most fair-minded people would agree that it is early days. Our focus is on understanding how companies have applied the regulations in the last couple of years. What trends can we see in remuneration packages? How have shareholders responded in terms of voting and engagement? We will publish the findings from that analysis shortly, and we will look to see whether we can draw any policy conclusions. When we implemented these policies, we always made it clear that we would keep them under review. What we know from the evidence available at the moment is that companies are responding to shareholder expectations. There are positive signs of restraint on the level of directors’ pay, and many companies have simplified their remuneration policy and linked it more closely to measurable performance over—crucially—a longer period of time.

Of course, the media will report rising pay. Sometimes that reflects previously agreed pay awards. What matters to the Government is the pay now being awarded under the new regime. As I mentioned earlier, the pay of the FTSE 100 CEOs has fallen significantly in the past two years. I gather also that statistics show that about a third of FTSE 100 CEOs and executive directors received no salary increase last year. It is our view that the reforms have begun to bring about a step change in transparency and that companies set out their future pay policies in much more detail than before.