Inequality

Iain Wright Excerpts

Thursday 27th November 2014 Commons Chamber

[Mr Iain Wright (Hartlepool) (Lab)]

I congratulate my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on securing what has been a short but perfectly formed debate, and the Backbench Business Committee on agreeing to it. He is right to point out that inequality is one of the most pressing issues facing our economy and society. It is clear that the economy does not work for many working people. Galloping advances in executive pay and real-terms pay cuts for most people in work does not suggest an economic model that is performing well or efficiently or providing the greatest benefits to the greatest number of people.

My right hon. Friend mentioned that for the past 30 years or so the prevailing model has been the shareholder value model, which was supposed to maximise returns to the shareholder. The argument goes that if there is an alignment between the interests of shareholders and executives, perhaps in the form of share option incentive plans, executives would act in the interests of the owners of the company. Evidence shows that that theory has been found wanting. Directors of large companies are often remunerated far in excess of the performance of the company that they lead or the extent to which they have created value for the firm’s stakeholders.

Don’t get me wrong: leading a company requires enormous skill and judgment, and those men and women—sadly, it is still predominantly men—should be rewarded for bringing such skill and judgment to bear. If that skill results in a company being transformed and improving beyond the norm, that should be recognised and appropriately remunerated; and as my right hon. Friend eloquently said, for all the talk of aligning shareholder and executive interests, ironically, executives have been extracting value from large companies for themselves at the expense of the company, its shareholders, its work force and ultimately its society. Let me illustrate this point.

In 1980, the median pay of directors in FTSE 100 companies was £63,000. At the time, median pay across the country was £5,400. In 2010, the median pay of directors in FTSE 100 companies was £2.99 million, while median wages for the rest of the country was £25,900. That meant that the ratio of executive wages to the average wage moved over a generation—30 years—from 11:1 to 116:1. And it is not getting any better, despite the recession, and despite stagnating economic activity.

The High Pay Centre revealed earlier this year that FTSE 100 chief executives received remuneration worth 143 times the average wage. This single fact encapsulates everything that is wrong. It takes a chief executive three days to receive what a worker on average wages earns in a year. That is at a time when there is an explosion in zero-hours contracts and greater insecurity at work for many people. Incomes are lower on average now than they were a decade ago, and the worst off and the lowest paid have seen the biggest falls, leading to a rise in in-work poverty that we have not seen in this country for decades.

I pay tribute to my fellow north-east MP, my hon. Friend the Member for City of Durham (Roberta Blackman-Woods), who made a passionate speech and is well versed in the problems of her constituency. She will know that figures derived from the Northern TUC show that our region has a particular problem in relation to low pay. In Hartlepool more than half of women working part time are paid below the living wage. She also mentioned the impact of spending cuts on general demand in a local economy. The north-east has borne the brunt of that. In Hartlepool we have lost £680 per household as a result of the austerity measures. That money has been taken away from the economy, exacerbating inequality in this country. We did not have a food bank in Hartlepool in 2010. We do now.

One in five workers in this country—some 5.2 million employees—are not paid the living wage. That has increased from 3.4 million workers in 2009. The UK has the second highest rate of low pay in the OECD, and lower levels of productivity than our main competitors. All this provides a compelling argument that inequality is not producing a more resilient or a more competitive economy. It is clear, as I said, that the economy does not work for most people. As my hon. Friend the Member for City of Durham said, we will succeed in the global economy only if these issues are tackled and if we address low pay and poor productivity, and work to ensure a more equitable distribution of wages.

My right hon. Friend mentioned an important point—perhaps all this would be excusable if a growing gulf between average pay and executive remuneration reflected superior company performance. The argument goes that talent on this scale, which is often global in its outlook, requires a premium in remuneration. Superstar pay packages attract super talent, which in turn incentivises superstellar performances. I have never quite understood, though, how executives are expected to be motivated to work harder by means of ever escalating pay, but workers on average and low earnings are supposed to be motivated by greater insecurity and no pay increases at all. But the evidence suggests that there is no correlation between executive pay and company performance—quite the reverse.

An article by Michael Cooper, Huseyin Gulen and Raghavendra Rau concluded that firms that pay their chief executive officer a sum within the top 10% of pay earn negative returns of –13% over the next five years. Throughout the whole of 2014, the FTSE 100 has fallen in value by 0.02%, even though executive pay has risen. The model of aligning executive pay with shareholder returns is broken, and the executives are the ones who are benefiting at the expense of others.

There appears to be a correlation between unequal and disproportionate reward at the top and inefficient and dysfunctional performance by the organisation. Far from securing star performers who can transform an organisation and motivate their work force, the more a firm’s executive pay exceeds the average in that company, the higher the rates of industrial action, staff turnover and work-related stress in that company. The evidence suggests that inequality is a disincentive to success, hard work and loyalty, as workers feel resentful that bosses at the top are not earning their remuneration. That breeds discontent, lower productivity and ultimately inferior company performance.

It is important that there is increased transparency and scrutiny in this area. I appreciate that the Government have made some progress in the past couple of years with its reforms of corporate governance and executive remuneration, but I think the Minister would agree that more needs to be done. That is why we believe that large firms should publish the ratio between the pay of their highest earner and that of the average employee in the organisation. I believe that is Liberal Democrat policy, and I hope the Minister will confirm that and say that it will be Government policy.

We believe that employees should be members of remuneration committees, ensuring that the voice of the workplace is heard when executive pay is set. We would reintroduce the 50p rate of income tax for the highest earners. We would raise the minimum wage to £8 an hour by 2020, bringing that rate closer to average earnings.

John Maynard Keynes said:

“The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.”

This debate has shown, as has evidence collated over the past 30 years, that those gains are often far in excess of what those activities have contributed to society and to those executives’ companies. A more unequal society results in a less productive economy. We in this House should resolve to change that.

--- Later in debate ---

[Mr Iain Wright]

I am glad the Minister has put that clarification on the record. She is galloping away somewhat, rather like executive pay over the past 30 years. May I bring her back to the Government’s reforms? In respect of binding votes, how many companies have had to change their pay policy as a result of shareholders voting against it?

[Jo Swinson]

I will talk about the particular reforms in a moment. There are two ways in which the Government’s reforms can have an impact on executive pay and, therefore, company behaviour when agreeing directors’ remuneration. One way, obviously, is to have a binding vote that a company could lose, and as a result the pay policy would not go forward. The other way—it is an important one—is that companies, because they know they will face a binding vote on executive pay, will be incentivised to have more detailed discussions with investors and shareholders in advance of the annual general meeting. I would not want us to get into a situation in which we thought that it was only if lots of votes were won that the reforms were not successful, when actually it might be a sign that there is much more engagement, which in itself would be a sign of success.

[Jo Swinson]

I certainly think that the points the right hon. Gentleman made about involving the work force are important. That is why our reforms require that it be set out how employees have been involved and consulted. It is not a prescriptive approach, but it requires that to be taken into consideration. Indeed, the Government have tried in other ways to influence corporate governance. For example, the work we have done on employee ownership has supported different types of ownership and engagement models, through various changes to the tax system and the provision of materials on how to make it easier for companies to convert to employee ownership models, so that employees can be much more involved in the running of their companies. We know that that can have real business benefits, because employees buy much more into the success of the company. That also starts to deal with some of the productivity issues that the hon. Member for Hartlepool mentioned.

[Mr Wright]

The Minister is making a very important point, and I really agree about the need to ensure that employees have a say in the running of their businesses, because that improves the value of those companies. Could that be formulated within corporate governance? Does she agree with the notion of having employees on remuneration committees?

[Jo Swinson]

I think there is a difference between recognising and supporting business benefits, and prescribing in legislation or regulation exactly how companies should go about doing that. There is a lot of agreement on the advantages for companies, but I do not think there is much agreement with the idea that the best way is for the Government to be very prescriptive, stating, “This is exactly what companies must do, and this is the only way to do it.” There are different ways in which companies can achieve that level of engagement successfully. It might be through employee representation on the board or remuneration committee, but there are other ways in which that can be done. We should enable companies to find the way that works best for them.

We are monitoring the impact of the reforms we are undertaking in the context of the 2014 reporting and annual general meeting season. We want to understand how companies have interpreted and applied the regulations, what trends can be observed in the remuneration packages that have been put forward and how shareholders have responded. We intend to publish the key findings from that work shortly, along with any policy conclusions that flow from them. We have always said that the policy will remain under review, because we want to see how what we have implemented works in practice.

Of course, it is useful for the Government to take on board and consider interesting proposals made in the House, in the context of looking at how our reforms are actually working. We know from the evidence already available that companies are increasingly responding to shareholder expectations on remuneration. There are positive signs of restraint on levels of directors’ pay and a substantial number of companies have simplified their remuneration policy, linking it much more closely to measurable performance over longer periods of time—that is crucial—to try to get away from the short-termism culture.

There have been reports in the media about rising pay, but often they reflect the impact of previously agreed pay awards. What matters most in assessing the impact of the reforms is what pay is being awarded under the new regime. The latest evidence shows that the median total remuneration awarded to FTSE 100 CEOs fell by 5% in 2012 and by a further 7% in 2013. Some 35% of those CEOs and 30% of the executive directors did not receive a salary increase at all last year. The median salary increase for FTSE 100 executive directors overall was 2.5%. Only 16% of companies gave their directors a salary increase of more than 3%; in the previous year that figure was 25%. The trend shows that pay is coming down, but obviously we will want to look at all the evidence that comes forward before publishing those findings and having a clearer picture.

The right hon. Member for Oldham West and Royton talked about the importance of engaging investors in the process. That ties in closely with the work my right hon. Friend the Business Secretary is doing on long-termism, particularly the Kay review, because investment funds, pension funds and so on have a crucial role to play as active investors. Important campaigning bodies have certainly achieved some success in getting much more engagement from those investors, so that they can properly hold to account the decisions on pay.

On the specifics of pay ratios, overall ratios certainly give us a picture of how things are across the economy, but I suggest a degree of caution about using a ratio between the top and the bottom for paid employees within a company. We considered that very carefully when we introduced the reforms. We decided not to mandate that ratio, as set out in the motion. Transparency is welcome, but we have to guard against potentially misleading information when that is broken down between the top and the bottom.

Obviously, that will depend on what sector the company is operating in and the type of staff working for it. For example, a large investment bank that outsources all its unskilled work could end up having quite a low ratio for pay between the top and the bottom, but a large retailer with a large number of relatively unskilled employees would have a much bigger ratio. The retailer could none the less be paying above the living wage and treating its employees pretty well. It might look as though it is the investment bank that should be polishing its halo, but perhaps that is because it outsources its unskilled work to be done in less favourable conditions. Therefore, we have to be slightly careful about unintended consequences, because some factors could mask what is actually happening. Comparing top and median pay might give a more realistic and meaningful figure. The hon. Member for Hartlepool is right to point out the Liberal Democrat policy in that area—he is undoubtedly an avid reader of Liberal Democrat policy documents, as I encourage all hon. Members to be.

The hon. Member for City of Durham (Roberta Blackman-Woods) raised a number of issues that are very important as part of the discussion on inequality and pay policy, particularly the pay gap for women. At the end of last week we heard the positive news that the pay gap is closing. However, we need to be cautious about celebrating that too much when we still have such a significant pay gap. Let us welcome the fact that it is being reduced, but also recognise that our aim has to be to eliminate it.

The hon. Lady’s concerns about part-time work are also important. There is far too much stigma within the workplace about how valuable somebody can be if they work part time. Very important work is being done by organisations such as Timewise to highlight the fact that people in very senior roles can work part time and do their jobs perfectly successfully, so we should be able to deal with some of those issues.

The hon. Lady also mentioned the living wage. We obviously have the national minimum wage, which is a floor, or a basic standard. Of course, this year we saw the first above-inflation rise in the national minimum wage since 2007, which is very welcome. That gives full-time workers a £355 increase each year. We want that to continue, if possible, without negatively impacting on employment. My right hon. Friend the Business Secretary has asked the Low Pay Commission to look at considering above-inflation rises in the national minimum wage, and we hope that, with a growing economy, that can be sustained. Of course, at the same time we have focused on helping people on low pay by cutting income tax by £800 a year, taking 3.2 million people on the national minimum wage out of paying income tax. We have done a significant amount, but we want to continue by encouraging employers to pay above the national minimum wage and to recognise that it is a minimum. Very profitable and successful companies should recognise their responsibilities to their employees, which might mean that they should be paying more. I welcome the fact that many employers are now turning into a positive the fact that they pay more than the minimum wage and badge themselves as a living wage employer. Of course, they will then be able better to compete for talented staff and get business benefits.

The hon. Lady is right about happiness and well-being. In 2010, the Prime Minister said that the Office for National Statistics would be collecting data on well-being and happiness. That was not met with universal acclaim in some sections of the press. I seem to recall that the Daily Mail was not necessarily delighted by the suggestion. I, for one, was delighted, having set up the all-party group on well-being economics and long campaigned for the importance of recognising that people, yes, care about their income and the size of the economy, but also care about the health and happiness of themselves and their loved ones. The more we recognise that in our policy making and in what we measure, the better.

The hon. Lady said that she did not know what had happened to that work, so I will update her. The ONS has been collecting the information, and about 250,000 people a year are questioned. As a result, a rich databank is being built up that can be broken down in interesting ways across different geographical areas, and between men and women and different age groups, so as to be able to assess the impact of policies and see what is happening in different parts of the country in different groups.

We recently announced the setting up of a “what works centre”—a research think-tank that the Government are supporting to analyse how different policies impact on well-being. From a BIS perspective, one of the key strands of this work is about well-being in the labour market and the workplace and what drives it. We recently published research that we have undertaken on that. A range of factors impact on workplace well-being. Obviously, pay is one, but there are also things such as the variety in someone’s job, whether they feel that they get to use their skills, whether they have a degree of autonomy, how they go about their job, and their sense of fairness in the workplace, which very much ties into this debate. I am glad to say that very many businesses are also engaged in this agenda and recognise that continuing to engage with the well-being of employees leads to better business performance.

We recognise that this is a very significant issue, and we have taken action. We do not want to see rewards for failure. A ratio cap as set out in the motion could, in its purest sense, have unintended and perverse consequences. Early signs of the response to our executive pay reforms are encouraging, and we will review their impact and publish the findings. We will continue to work to ensure that pay policies become fairer, and also support low-paid workers by cutting income tax. I know that we will return to this topic in the House. I thank the right hon. Member for Oldham West and Royton and the Backbench Business Committee for giving us the opportunity to discuss it today.