Introduction of a Maximum Wage

Iain Wright Excerpts

Tuesday 10th February 2015 Westminster Hall

[Mr Iain Wright (Hartlepool) (Lab)]

May I begin by saying how good it is to see you in the Chair, Mr Streeter? I am very pleased to have you presiding over our proceedings this afternoon. I particularly want to thank my hon. Friend the Member for Inverclyde (Mr McKenzie) for securing the debate, and also my hon. Friend the Member for Coventry South (Mr Cunningham) and the hon. Member for Strangford (Jim Shannon) for their contributions. I also thank the hon. Gentleman for his usual courtesy in telling us about his commitments elsewhere on the parliamentary estate.

I pay my commiserations to the Minister for having to deal with this debate at the last possible moment, having had it transferred at the 23rd hour from Treasury Ministers. Presumably Ministers at the Treasury are recovering today from their £15,000-a-table black-and-white fundraising ball—nothing to do with Newcastle United, I understand—where lucky recipients had the chance to bid to go shoe shopping with the Home Secretary or for a meal at the Carlton club with the Culture Secretary. Personally, I would rather go for a pint with the Culture Minister who is in the Chamber today. Alternatively, perhaps Treasury Ministers are engaged with tackling the issues of HSBC and the collusion with its clients over tax evasion.

I deliberately make those two points, not for cheap party political point scoring, but because they touch on an important theme in today’s debate, namely a growing inequality in society. As my hon. Friend the Member for Inverclyde said, how can it be either morally fair or economically efficient that there is a widening gulf between working people in Inverclyde, Strangford or Hartlepool, who have seen their pay cut and living standards fall, and people at the top of business—often financial backers to the Conservative party—who have seen their rewards grow exponentially and disproportionately and their tax bill fall over the lifetime of this Parliament?

Since this debate started 33 minutes ago, the average FTSE 100 chief executive has earned £297. That seems an astonishing amount of money in such a short time. In 1980, the median pay of directors in FTSE 100 companies was £63,000. At that time, the median pay across the country was £5,400. The ratio of executive pay to the average wage some 35 years ago was 11:1. In 2013, that ratio had moved to 130:1. Despite the Government’s reforms—to which I will refer later, as will the Minister, no doubt, in his response—the annual Manifest/MM&K directors’ total remuneration report estimated that pay received by the average FTSE 100 chief executive increased from £4.1 million to £4.7 million in the year following the reforms.

In contrast, as was touched on very well by my hon. Friend, one in five workers—that is, more than five million people—earn less than a living wage, up from 4.8 million in 2012 and 3.4 million in 2009. Almost a quarter of north-east workers—I speak as a proud north-eastern MP—and nearly half of all part-time staff are not being paid a living wage. Regrettably, my constituency has the largest proportion of jobs paying less than the living wage in the north-east, at 34.7%. More than 5 million people do not earn a decent wage. People are trapped in low-paid, insecure jobs; of employees earning the minimum wage for five years, one in four—the highest proportion since records began—have been unable to move out of that low pay for all of that period.

It is striking that the people most likely to be in poverty in Britain in the 21st century are those in work. No one can honestly suggest that the economy is working well or as productively as it could be when that is the case. This country will not achieve our vision of a highly skilled, well paid and innovative work force, ensuring that the benefits of economic growth are enjoyed by all in work, if we continue down the present path. My hon. Friend hit the nail on the head when he said that trickle-down economics is a fallacy. The taxpayer is having to subsidise, through tax credits and other parts of the welfare state, the failure of many firms to pay a decent wage. It is estimated that the cost to the Exchequer, in terms of spending on in-work benefits and lost tax revenue, is almost £3.25 billion a year. The loss of the real value of the minimum wage over the lifetime of this Parliament has cost taxpayers an additional £270 million in extra public spending. That cannot be right. The state should not be paying for the failures of the corporate world.

The Government introduced new regulations for executive pay in 2013, and no doubt the Minister will want to talk about those. Shareholders now have a binding veto over company executive pay policy. The regulations require companies to provide greater transparency—for example, by reporting the ratio of average percentage change in employee pay compared with the percentage change in the chief executive’s pay. However, I would question whether the Government’s reforms are having the intended effect.

It is true that several companies, such as Burberry, Kentz and BG Group, have had to revise executive remuneration in the face of shareholders’ votes, but will the Minister confirm that less than 1% of all relevant companies have seen shareholders reject pay proposals? No doubt the Minister might respond to that point by saying that that proves the system is working, because it encourages companies to talk in advance about their remuneration packages to their shareholders, thereby promoting greater dialogue. However, I would question that argument. Professor Peter Wright—no relation of mine—of the university of Sheffield, in a report, “CEO pay and voting dissent before and after the crisis”, concludes:

“The government has promoted shareholder activism as a key mechanism for restraining corporate excess and securing the long- term health of the UK’s biggest firms. But our results suggest that any expectations that the recent changes to give shareholders a binding vote on directors’ pay will have a big impact may be sorely disappointed.”

The Minister must be concerned that, as the economy improves, the practices and trends of the past 30 years will be entrenched once more, so that executive pay continues to runs out of kilter, at odds with the performance of the company and far in excess of the remuneration of the rest of the work force. As my hon. Friend rightly said, I do not think anybody is suggesting that talent is not required to run a big company, and if the chief executive, along with the board and all the rest of the work force, produces good results, those benefits should be shared. However, the pay of chief executives is now out of kilter with the performance and share prices of big companies. It cannot be right that pay and performance is so misaligned.

On that basis, given this important debate, will the Minister pledge to go further, not only on the narrow issue of executive pay, but on the fundamental matter of corporate governance? How will he ensure that the rules of the market and companies are aligned to ensure that we see companies creating value for the long term, not extracting value for an immediate boost at the expense of long-term productivity gains? Will he pledge to ensure that employees have much more of a say in the strategic direction and corporate governance of a company by, for example, ensuring that workers sit on remuneration committees to scrutinise and hold to account the pay packages of top bosses?

Will the Minister also ensure that low pay is tackled? I fully agree with the hon. Member for Strangford—who has now gone to fulfil his Bill Committee responsibilities—that we need to tackle wage inequality, but ensure that we do not bring executive pay down at the expense of low pay. We need to make sure that lower pay is boosted, so that the situation for low-paid workers is enhanced. Will the Minister agree to our proposal of a “make work pay” contract, so that firms that sign up to become living wage employers in the first year of the next Parliament will benefit from a 12-month tax rebate of up to £1,000 for every low-paid worker who gets a pay increase? Will the Minister agree with Labour’s proposals to bring the minimum wage closer to average earnings, setting the Low Pay Commission the target of boosting it to 58% of median earnings? That would mean that it was £8 by the end of the next Parliament, ensuring that workers on low pay got a £60 per week boost, or £3,000 more a year.

This important debate relates to what companies do, how they act in society and what makes them successful. Britain is great, and we have some of the most creative and hard-working people anywhere in the world, but it cannot be right, in a moral society or a productive economy, that the rewards for the few at the top are distorted at the expense of the majority, while far too many workers cannot have a secure, dignified job that pays the bills.

I respect the Minister, who often has to respond to debates that are not part of his brief, but he must accept that the Government’s response in this Parliament to wage inequality has come far too late and been far too lacklustre. In their remaining days in office, I hope he will address that, set out where his Administration have gone wrong and acknowledge that we will need a Labour Government in 85 days’ time if we are to tackle wage inequality.

--- Later in debate ---

[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.

[Mr Iain Wright]

I think that the Minister is being deliberately precise in his language when he talks about chief executives’ salaries not going up. Has he considered their total remuneration? Is he concerned that, although basic salary may be falling, executive pay is going up disproportionately through share options and vesting rights?

[Mr Vaizey]

The reason why we focus on salary is that often the bonus is linked to salary as a percentage; if shareholders have a say in the salary of the CEO, they in effect have a say in the bonus. Clearly, shareholders will also have views on the level of the bonus that is linked to the salary. The crucial point is that we want more transparency.

As I said earlier, I believe that shareholders are engaged more proactively in the remuneration package of CEOs. For example, Aberdeen Asset Management clarified the extent of arrangements to limit payments in lieu of notice to departing directors because shareholders were concerned about the potential for rewarding failure. Furthermore, Imperial Tobacco was forced to clarify the fact that it would not give a golden hello to a newly recruited director and capped the level of the package for that director, with reference to previous salaries and policies. [Interruption.]