FTSE 100 Company Pay Ratios

Kirsty Blackman Excerpts

Wednesday 23rd January 2019 Westminster Hall

[Kirsty Blackman (Aberdeen North) (SNP)]

It is a pleasure to take part in this debate, Mrs Moon, and I congratulate the hon. Member for Mitcham and Morden (Siobhain McDonagh) on having secured it. It is unfortunate that it is not as well subscribed as I had expected it to be; I had thought that this was a great debate to be involved in, on an issue that matters a huge amount to an awful lot of people who live in all the countries of the UK. I will highlight a few figures, some of which have already been mentioned by the hon. Lady; I will also talk about what we are doing about some of these issues in Scotland, and what we would like to do about them.

The remuneration of FTSE 100 CEOs between 2009-10 and 2017-18, over the course of this Conservative Government, has gone up by 66%, which is a significant increase. One of the interesting stats that I discovered when I was looking into this issue is that in 1980, median FTSE 100 CEO pay was 11 times that of the median worker. By 2010, that had risen to 116 times the pay of the median worker—an absolutely massive increase that surely does not reflect an increased workload of that level. I imagine that those CEOs are not doing 10 times the amount of work they were doing in 1980, and that the people who are working at the bottom of those companies are working just as hard as they were in 1980. An increase in the ratio to that extent cannot be justified.

In 2017, the mean pay of a FTSE 100 boss was £5.7 million. Compared with many people who live in my constituency or throughout these islands, I have a significantly large salary. I am very grateful for that, but even on my relatively large salary, £5.7 million is a number that I cannot even comprehend. It is a ridiculous amount of money for people to be earning.

I understand that the hon. Member for Mitcham and Morden was talking not about the particular salary that those individuals receive but about the ratio, and that is what I want to come on to. The important point about this debate is that it is about equality, and it goes much wider than FTSE 100 companies. We have massive inequality throughout the countries of the UK and much more can be done to improve the situation. When seeking to improve things, I tend to say that we can do so in Parliament, because we have the ability to lead the way as parliamentarians. We often fail, but we have that ability. We also have the ability to legislate to ensure that FTSE 100 companies can lead the way for all companies across the UK in removing the levels of inequality.

It is not only the person on the street or the person working at the bottom of these companies who is unhappy; there is also continuing shareholder dissent. It is important that shareholders are empowered and have the ability to make changes. They are unhappy and there is backlash from them about the massive bonuses and huge pay increases received by CEOs. If we empowered shareholders a bit more, they would have the ability to make those choices to help reduce inequality throughout the companies. Shareholders do not want to be associated with a company that has a CEO receiving a massive salary, massive bonuses and massive pay rises while the worker working on the basic wage is having their bonus scheme removed, for example. It is important that shareholders who have that moral compass can make that mark on the company.

It is important to look at corporate governance legislation and regulations. The changes on reporting the gender pay gap are helpful, but they do not go far enough. It is good that we have reporting on the gender pay gap, but there should be something—not so much a carrot, as a stick—to ensure that the gender pay gap improves. It would be unreasonable to ask companies with a massive gender pay gap to reduce it to nothing in one year, but it would be reasonable for the Government to mandate companies to show progress in reducing the gender pay gap. That should involve not just saying, “This is what we will do about it”, but, “This is the timeline on which we expect to make progress. We will reduce our gender pay gap by 5% in the next two years and reduce it further after that.”

A similar approach could be taken to wage ratios. Companies could be subject to a reporting requirement to submit details on how they will improve the ratio with set targets, and they could be subject to some kind of punishment if they do not meet those targets, rather than them just saying, “This is what we are doing”, but with no set outcomes. That is where a lot of people are on gender pay reporting and ratios.

In Scotland, the Scottish Government have put social justice at the heart of civil service pay policy. Public sector employees in Scotland are paid at least the Scottish living wage, and we have no age requirement for that. Under-25s who would receive a lower minimum wage under UK legislation are eligible to receive the Scottish living wage if they work in the Scottish public sector, no matter their age. We recognise that just because someone is 24, it does not mean they have fewer outgoings than someone who is 25. They could be in exactly the same set-up, renting a flat and with a small child, whether they are 24 or 25. The Government desperately need to tackle the fact that under-25s are being paid less. The Scottish National party has been vociferously making that case at every possible opportunity, including my hon. Friends the Members for Glasgow Central (Alison Thewliss) and for Glasgow East (David Linden) with a ten-minute rule Bill.

The UK Government are not taking the necessary action, so we are asking them to give Holyrood the power to legislate on maximum and minimum wages. That would address the lower end of the spectrum where people should be paid an actual living wage—one that they can really live on, not a pretendy living wage—and, at the other end, maximum wages and bonus payments. We want power over wage ratios. That is not to say that we have a set idea of exactly how we would legislate on high wage ratios, but if Holyrood had the power to do so we could at least have those conversations and consultations. We could come up with a policy that would work for employees, shareholders and the general public. We believe that we are more likely to take action than the UK Government, given their track record. They have not moved as far as we would to tackle inequality in Scotland.

In terms of SNP policy, in June 2018 we had a very good debate at SNP conference about wage ratios. We agreed as a party—our policy is made at party conference—that wage ratios would be one way to tackle inequality and that we would consider it and take it on. An independent Scotland would have a wage ratios consultation and discussion and, if possible, a policy. We would look at the best possible way to do that.

I want to talk a little about the real living wage and employment in Scotland. Employment law is reserved to Westminster, which we have argued against because the SNP and Scottish parliamentarians in general—this view is not reserved to the SNP—have much more respect for workers’ rights, so there is much more likelihood of them improving if we had the ability to legislate in our Parliament. Despite not having power over the issue, we have tried to make changes in our society and, to a limited extent, we have. A lower proportion of people in Scotland are on zero-hours contracts than in any other nation of the UK. The Scottish Government were the first Government in the UK to become a living wage employer, so we are putting our money where our mouth is. We are saying to people, “We are proving that we can do this. We are proving that we will put workers’ rights at the heart of what we do. That is why we believe that Holyrood should have power over that.”

Down here, we vociferously opposed the Trade Union Act 2016. We disagreed with a huge number of things in it. It is incredibly important that we have strong trade unions. If trade unions had the abilities that they previously had, their voice would be heard much more loudly. It would be amplified by the legislation, rather than quashed. Wage ratios would be tackled much more vociferously by the trade unions.

In this Parliament, we have also promoted a Bill to ban unpaid trial shifts, which would give rights to those workers who are forced to work for nothing while doing a trial shift. We promoted a Bill to give workers in precarious work the same rights as employees. It is incredibly important to ensure that they enjoy the same rights as people in more stable employment. In fact, it is even more important for someone in precarious work to have those rights than someone in work that is a bit more stable. That was a good Bill, promoted by the SNP.

Our most recent Bill was on employment rights. It would have stopped gig economy workers and small and medium-sized enterprises getting late payments, which is important for cash flow. Our Bill made clear the importance of someone working in the gig economy being paid on time.

Lastly, I want to talk about what the Scottish Government have done. In Scotland, we have the fairest income tax system in the UK. Some 55% of our taxpayers pay less than they would if they lived elsewhere in the UK. About half of English taxpayers pay more than they would if they lived in Scotland. It is the lowest-paid workers, not those at the top, who are paying more in England and less in Scotland. Next year, the top 1% will be asked to pay a little more on their income, and the remaining 99% will pay the same or less than at present. I therefore suggest that the Scottish Government’s policy on income tax is much better and fairer than that of the UK Government.

We are regularly attacked by the Scottish Tories for what we have done to improve fairness in income tax, but since we introduced the Scottish rate of income tax and varied the rates, our economy has grown faster than that of England, so the suggestions that all sorts of chaos would follow have not come to pass. There is a real difference between the actions of the Scottish Government and those of the UK Government. At every opportunity the Scottish Government have pursued fairness and attempted to reduce inequality, and the Bills that the SNP has promoted down here have attempted to reduce inequality in the whole of the UK because workers’ rights are currently a reserved matter.

Holyrood does not have the full range of powers over this matter. We want workers’ rights to be devolved to Scotland. However, given the chaos that is happening and the impact that Brexit will have on the lowest paid in particular, it is increasingly evident that Scottish independence is the only way forward. If Scotland had control over workers’ rights, we would make better decisions than the UK Government are currently making, and that makes the case for Scottish independence ever stronger.

[Laura Pidcock (North West Durham) (Lab)]

I thank my hon. Friend the Member for Mitcham and Morden (Siobhain McDonagh) for securing this important and timely debate. Such debates expose our politics and the difference between political parties. It is vital that we discuss not only pay ratios, but solutions to extortionate pay, such as an excessive pay levy, and improved collective bargaining for workers through strong trade unions as a way to uplift the pay of millions of workers. It is also crucial that we are able to place the extortionately high pay of FTSE 100 chief executives in the context of low pay and the crisis of work in this country, where millions struggle to make ends meet, and where work is certainly no longer the preventer of poverty, which is a reality for millions of people.

Despite this state of affairs, as was mentioned, by lunchtime on 4 January, the top chief executives in the UK had been paid more than their average employee is paid in an entire year—an extraordinary fact. Every single year, that date and time comes sooner in the year. Unless action is taken, it will be one minute past midnight on 1 January when those people will have been paid much more than their employees. Every year, the Government take no action on that extraordinary fact. Those at the top are increasing their wealth.

I agree with my hon. Friend: perhaps this place should relax a little, because “fat cats” is exactly the right title for those executives who now get 133 times more than the average worker, which means that the salary of the average FTSE chief executive is the same as that of 386 workers on the minimum wage. It is politically poignant to note that some people are not outraged by that statistic. They are quite comfortable with the inordinate, huge salaries of executives who are paid grossly more than those who work for them.

I am sure that nobody would argue—my hon. Friend touched on this—that a FTSE 100 chief executive works 133 times harder than a hospital porter, a cleaner or a caterer. I went on a solidarity protest yesterday with strikers at the Ministry of Justice and the Department for Business, Energy and Industrial Strategy. Let us think about the caterer on exactly £8 an hour fighting for the London living wage. That works out at about £1,280 a month if they work a 40-hour week every single week of the month. If we think of rent, transport, bills and food, that person has a tiny amount to live on every month. I am sure nobody would argue that a FTSE 100 chief executive works 133 times harder than a teacher or a nurse in our NHS, or that they somehow have a combined worth of 386 workers.

[Kirsty Blackman]

The hon. Lady is making an incredibly powerful point. Does it annoy her as much as it annoys me that the Tories talk about hard-working families, but they do not mean hospital porters? They mean people who are much higher up the tree. Hospital porters, cleaners, chefs and the people she talks about work incredibly hard every day just to make £8 an hour.

[Laura Pidcock]

And that work should be valued. It is no coincidence that those people who work really hard, but very often still cannot survive and do not have enough money to pay the bills, get into debt to pay for everyday items—not for luxury holidays, or any luxuries at all. Those people should be at the heart of our concerns in this place. I am mindful never to use the word “earn” when we talk about the pay of the very few at the top. What could they possibly do to earn such large amounts of money?

It is crucial to recognise the context in which FTSE 100 pay ratios are widening. In a stark contrast to the stockpiling of wealth by a few, years of austerity and wage stagnation mean that millions of workers across the country struggle to make ends meet, as I say. In-work poverty is rising and household debt is at its highest rate. Many people rely on borrowing, and one in five workers—more than 5 million people—are paid less than a living wage. That is a huge increase from 3.4 million in 2009. Insecure work has without a doubt become the norm, with nearly 4 million people—one in nine workers—facing uncertainty and worry. They are trapped. To illustrate the low-pay trap, one in four employees earning the minimum wage for five years has been unable to move out of that low-pay trap. Some people do two or three jobs to try to pay the bills, but it has not always been like that.

In 1980, as was mentioned, the median pay of directors in FTSE 100 companies was £63,000, and median pay across the country was £5,400. The ratio of executive pay to the average wage then, less than 40 years ago, was 11:1. In 2002, the pay of a FTSE 100 CEO had shot up to 79 times that of their average employee, and last year it had reached 150 times. This place is doing nothing to stop that runaway train of inequality. I seriously hope that those ratios are unacceptable and completely unjustifiable to anyone. It is particularly obscene that this escalation has come at a time when millions of people are struggling. There is a stark contrast between those two sets of people.

No doubt the Minister will refer to the Government’s reforms to tackle excessive pay in her speech shortly, but I want to make it absolutely clear that under this Government, not only has pay inequality continued to rise, but so has the speed at which it increases. I am proud that Opposition MPs are committed to taking action, because doing nothing is not good enough. When I have been out campaigning, loads of times I have heard people say, “The rich continue to get richer and the poor get poorer. There is nothing we can do about it,” but I fundamentally disagree. Yes, the rich are getting richer, but we can definitely do something about it.

In contrast to the Tories, a Labour Government would ensure pay ratios of no more than 20:1 in the public sector, for example, and we would introduce an excessive pay levy that would charge a 2.5% levy on earnings above £330,000 a year, which is a huge amount, and 5% on those above £500,000. It is estimated that that alone would raise £1.3 billion a year.

I am sure that the Minister will mention that from 1 July the Government will ensure that companies with more than 250 employees will be obliged to reveal and justify their pay ratios. However, there is no obligation on those companies to take any meaningful action beyond the act of publishing those facts. It is yet more empty rhetoric. How is it helpful just to have the injustice out there, without any action to remedy it?

We need practical, political solutions to curb undeserved excessive pay, and to create mechanisms for better income distribution. That is why we commissioned a report by Prem Sikka, published last year, suggesting a range of measures that would apply to the more than 7,000 companies in the UK that have more than 250 employees, accounting for more than 10 million workers. Needless to say, we are looking at the report’s recommendations closely, including proposals requiring executive remuneration packages of all large companies to be subject to a binding vote.

That is just one solution to excessive executive pay. Trade unions are the collective voice of workers, and they have to be central to the debate. They are a huge player in reducing inequality in the workplace, but, after years of anti-union policies, the vast majority of workers have absolutely no say over their pay, conditions or hours of work. Protections that existed before under collective bargaining agreements have been completely lost.

Workers deserve a lot more. Pay ratios are just one aspect of tacking pay inequality. That is why a Labour Government would set up a new Department to roll out sectoral collective bargaining—protecting the interests of workers, strengthening trade unions, and introducing new rights and freedoms so that every worker gets the support, security and pay at work that they deserve.

Surely it is time to end the excessive greed. People are feasting on the backs of workers who are struggling to make ends meet, and who have the gut-wrenching feeling that they cannot afford nappies for their children, even though they work more than 40 hours a week. Surely that cannot be right. The Government must act to end that injustice.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

It is a pleasure to serve under your chairmanship, Mrs Moon. I congratulate the hon. Member for Mitcham and Morden (Siobhain McDonagh) on securing today’s important debate. She has a strong, long-standing record of campaigning on behalf of low-paid workers in the economy. I highlight the constructive way in which she approaches working across the House on some of these issues; I know that she secured an Adjournment debate on whole-company pay policy last July.

Executive salaries and pay ratios are undeniably high. Currently, the ratio of the pay of the average FTSE 100 chief executive officer to that of the average UK employee is around 160:1, based on the mean. The median average is 145:1, but it is important to set current levels of pay in a longer-term context. The data shows that executive pay more than quadrupled from the late 1990s to the early 2010s. Pay ratios increased over that period from 47:1 in 1998 to 132:1 in 2010. However, that has stabilised in the last five to seven years, albeit with minor fluctuations from year to year.

The High Pay Centre, which campaigns against high levels of executive pay, acknowledged in its most recent report that UK executive median pay peaked at £4.2 million in 2013, and is around £3.9 million for the latest reported year. That puts the UK on a par with Germany and only slightly above other major EU countries on executive pay levels, despite our quoted companies generally being much larger. In the US, CEO pay is much higher. Median CEO pay for Standard & Poor’s 500 companies in 2017 was around £9.3 million, giving the US a pay ratio of 399:1.

That sets the context, but it is certainly not grounds for complacency. Shareholders and people in wider society have increasingly been questioning how such wide differentials can be justified, both in terms of individual performance and in relation to company pay policy as a whole. The Government share those concerns.

We do not believe that it is the job of the Government to set company pay levels or impose arbitrary caps. However, it is our position that there must be transparency and accountability in executive pay, and that shareholders must have the information and the powers to challenge unjustified pay in the boardroom. That is why we legislated in 2013 to require listed companies to secure binding shareholder approval for their executive remuneration policies at least once every three years, and to disclose every year the total single figure that each director is paid.

It is also why we are continuing to take steps to force companies to disclose and explain how executive pay is matched by performance, and how it relates to wider employee pay. In particular, we recently introduced a new requirement for companies to disclose and explain every year the ratio of their CEO pay to the average pay of their employees. I am pleased that the hon. Member for Mitcham and Morden welcomed the legislation, which came into effect at the beginning of this year, meaning that companies will have to report their ratios when they publish annual reports next year.

Pay ratio reporting will, for the first time, show systematically and clearly how pay at the top of quoted companies relates to pay across the rest of the company. Companies will have to report each year the ratio of the CEO’s pay to both the median and the quartile employee pay at the company. The hon. Lady expressed concerns that the pay ratio was being calculated only in relation to the median; in fact, we require pay ratios to be published for the first quartile, the median and the upper quartile. We thought hard about whether to use the median or the mean, and finally decided on the median as a more robust figure. In part, that was a response to the TUC, which argued strongly that we should use the median. In most cases, we use the median because the result is the bigger ratio.

Shareholders, employees and others will get a clear and consistent picture from year to year of how CEO pay relates to pay across the whole company. Companies will need to explain the reasons for any change from previous years, and any pay ratio trend over time. They will also need to explain whether any change is due to a change in the company’s employment model—for example, if the reason was the outsourcing or offshoring of low-paid workers. Critically, the company will have to explain whether, and if so why, it thinks that the ratio is consistent with the pay, reward and progression policies of the company’s UK employees as a whole.

Those pay ratio explanations will be watched closely by investors, who are strongly behind the new pay ratio reporting, as well as by employees and wider society. Any company that puts forward weak or misleading explanations can expect to face significant shareholder and public criticism. As the Financial Times wrote in 2017 when we announced the plans,

“a single-figure ratio will attract attention. And that will help investors curb companies’ attempts to inflate chief executive pay—and the pay gap”.

Pay ratio reporting is part of a wider package of reforms aimed at making a real change to the level of engagement between boardrooms and employees. That package includes an important new provision in the UK corporate governance code for remuneration committees to consider workforce pay alongside executive pay, and to engage with the workforce to explain how executive pay aligns with wider company policy. It is too early to tell what the impact of the new reforms will be. The Government expect companies to respond positively and creatively to the new requirements, recognising that no one size will fit all and that there will be a variety of approaches.

We are already seeing some encouraging progress, on a voluntary basis, this year. For example, Marks & Spencer has agreed that the chair of its business involvement group, which represents the interests of the company’s 81,000 staff, will be invited to attend two boardroom meetings and at least one remuneration committee meeting each year. We must also remember that pay ratios are determined by average pay in the workforce, as well as by pay at the top, so ratios will fall where average pay increases faster than executive pay. In that respect, the Government are taking steps to boost the wages of working people through our industrial strategy to deliver better-paid jobs across the country, our £37 billion productivity investment fund and our increase in R&D investment to 2.4% of GDP by 2027.

We have taken concrete action for low-paid workers by introducing the national living wage, which is on track to hit its target of 60% of median earnings by 2020. Its introduction marked a pay rise for more than a million workers across the UK and has helped to deliver the fastest wage growth for the lowest-paid in 20 years. In April, we will increase it again to £8.21 by an inflation-busting 4.9%—an increase in earnings of more than £690 a year for a full-time worker, and a total pay rise of more than £2,750 a year since we first brought it in. Up to 2.4 million workers are estimated to benefit.

Real progress is being made for hard-working people. As a working-class Conservative MP—as a Tory—when I speak about hard-working families and hard-working people, I find that I am accused of referring to higher earners. As somebody who undertook many of the jobs outlined in this debate before I came to Parliament, I actually find it offensive that when I talk about hard-working people, I am accused of not referring to hard-working people separated across our economy.

[Kirsty Blackman]

I appreciate the Minister’s honesty. The problem is that when the middle-rate income tax threshold goes up, there are Conservatives who make the case that it will improve life for hard-working families, but very few people in the jobs we are talking about are making £43,000 a year. Maybe the Minister needs to tackle the issue with some of her colleagues.

[Kelly Tolhurst]

I thank the hon. Lady for clarifying her point, but I have to say that it is this Government who have increased the threshold year on year. As a working-class Conservative MP, I am proud to say that I am standing up for hard-working people—and when I talk about hard-working people, I mean people who go out every day to earn a living, no matter what sector they are in or what job they are doing.

The Government have responded to the challenging world of work with plans for the biggest upgrade of workers’ rights in 20 years. In December we published the good work plan, which sets out how we will implement the recommendations of the Taylor review. The plan commits us to introducing a right to request a more predictable and stable contract for all workers and to bringing forward proposals for a single workers’ rights enforcement body in early 2019.