Whole Company Pay Policy

Lord Harrington of Watford Excerpts

Monday 16th July 2018 Commons Chamber

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

I congratulate the hon. Member for Mitcham and Morden (Siobhain McDonagh) on securing this evening’s debate. This is an important subject, and I commend her passion and her extensive campaigning on behalf of lower-paid workers in our economy. However, I know that she wants more than to be commended by me; she wants answers to her questions. I shall do my best to provide them. I recognise, and sympathise with, her view that executive pay in this country too often seems to exist in a bubble that is disconnected from the pay and experiences of ordinary working people.

I accept the hon. Lady’s numbers. We saw a staggering quadrupling in the average pay of FTSE 100 chief executive officers from the late 1990s to 2011 from just under £1 million a year to more than £4 million. I think that this has been imported from America, where the differences are even larger. Executive pay levels have largely stabilised since then, but shareholders and the wider society have increasingly questioned how such dramatic levels of reward can be justified, both in terms of individual performance and in relation to a company’s pay policy as a whole. The Government share that concern. We are not against CEOs being well paid for doing what is certainly a hugely demanding an important job. We accept that they have a lot of responsibility. For example, if part-time workers are included, Sainsbury’s has 180,000 people, and any one person who is responsible for 180,000 people certainly deserves rewarding well. I do not think that anyone would dispute that.

[Jim Shannon]

The point that the hon. Lady made with passion is that workers who have given effort, commitment and loyalty to a firm should be rewarded. The whole workforce should be rewarded, not just one person.

[Richard Harrington]

I absolutely agree, but pay is earned for several reasons. Hard work is definitely one of them. I am not comparing ourselves, but we are all here at 11.40 pm, so no one could say that we are not working hard. The dispute would come from the second reason for pay, which is how well someone is working and the their responsibilities. I would not ask the hon. Gentleman to intervene to say how well he thinks I am doing, but I certainly know that he and the hon. Member for Mitcham and Morden do a good job. I am not making light of the situation; I mean that reward is partly based on how well someone is doing and partly on how hard they work, but part of it is about responsibility. We would all agree that chief executives have a lot of responsibility, and they should not have job security because they are putting themselves on the line for workers, shareholders, banks or whomever it might be. This is a question of extent and of how much reward is performance related and how much of it is a basic salary. I hope that the hon. Member for Mitcham and Morden and the hon. Member for Strangford (Jim Shannon) do not think that I am trying to make light of this, because there is a significant issue here.

We may disagree on this, but I think the answer lies with transparency and accountability in how executive pay is set and in how it fits with wider employee pay and incentives. The Government have introduced major reforms on executive pay, and the first package in 2013 and the second package approved by Parliament just last week are important. The 2013 reforms compelled quoted companies to disclose each year the total pay and benefits of their CEOs and directors and to explain how that relates to company and individual performance. For the first time—this is important—we gave shareholders a legally binding vote on a company’s executive pay policy, with which all payments to directors must comply. Taken together, the two reforms have forced companies to be much more rigorous and transparent in their approach to executive pay.

However, more needed to be done, in particular to increase transparency and accountability in how pay at the top relates to pay and reward across the rest of the company. It is vital that companies demonstrate cohesion and a comprehensible line of sight between executive pay and the pay of other employees. They are all part of the company, and part of its success, and a confident organisation should be willing and able to explain how its approach to pay is consistent across all its employees. That is why the Government are now implementing major new statutory and code-based reform measures on executive pay as part of a wider package of corporate governance reform.

The headline reform measure—this is directly relevant to the hon. Lady’s speech—is to require all quoted companies to disclose and explain the ratio of their CEO’s pay to both the median average and the quartile pay of their UK employees. The pay ratio statement must include an explanation of

“whether, and if so why, the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole.”

That will allow shareholders, employees and other interested parties to see how pay in the boardroom relates to wider employee pay throughout the company and, importantly, whether and how the directors of the company believe the differentials are justified. This is not just about employees, important though they are, because shareholders have strongly backed the introduction of pay ratio reporting and will be watching closely both the figures and the explanations, which they have made clear must be meaningful and relevant.

UK shareholders are increasingly vocal and assertive in holding companies to account on executive pay and other issues, which the Government support. The Government requested the Investment Association to establish the world’s first public register of shareholder dissent, so that there is a publicly monitored record of companies that receive more than 20% votes against executive pay packages. Halfway through the first year, there have been 140 significant shareholder rebellions on pay and other matters—more than the total for the whole of last year.

The Government have asked the Financial Reporting Council to consult on a number of new executive pay provisions in the UK corporate governance code, including a requirement for remuneration committees to explain what engagement with the wider workforce has taken place on how executive pay aligns with wider company policy. I am pleased to say that this new measure forms part of the revised corporate governance code published by the FRC earlier today—this is very topical—as part of a wider package of corporate governance reforms that require companies to put in place one or more of either a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director. It is complicated, but we are making developments. Companies will have to report on how they have had regard to the interests of employees. The statutory instrument was approved by Parliament last week and requires large companies to report each year on how they have had regard to the interests of their employees and on how it has influenced the decision making of directors.

All these measures will be in place from the start of January 2019, and I take the opportunity to thank everyone in this House, particularly the Business, Energy and Industrial Strategy Committee and the all-party parliamentary group on corporate governance, for their constructive contributions to this agenda over the past two years.

Before I finish, I will address some of the questions raised by the hon. Member for Mitcham and Morden.

[Siobhain McDonagh]

Will the Minister address the issue of pay between assignment contracts?

[Richard Harrington]

I will do my best but, if the hon. Lady is not satisfied with my answer because of the time available, I would be very happy to meet her to discuss this complex subject.

The question of agency staff being paid less despite doing the same work are known as assignment contracts, as I am sure you are aware, Mr Deputy Speaker—you are omnipotent and know everything, or most things, I have ever asked you about. The hon. Lady referred to that as subcontracting some of the lower-paid workers. The Government are looking into that as part of our response to the Taylor review. There is a specific consultation on agency workers in response to that. I know that might not sound like the comprehensive answer the hon. Lady wants, but it is work in progress and I suggest she wait a little before having the meeting, when I will be happy to go through it with her.

Mr Simon Roberts, the retail and operations director of Sainsbury’s, wrote a very comprehensive letter to the Government proudly saying that Sainsbury’s has met the hon. Lady on several occasions. Mr Roberts clearly has not satisfied her, but he has written a four-page letter to us about it. At least Sainsbury’s has had the guts to meet the hon. Lady, and I am sorry that she is not satisfied.

Sainsbury’s has 185,000 employees, and the hon. Lady’s main point is that it is unfair of Sainsbury’s to continue paying its CEO a bonus while cutting bonuses and other variable pay for the rest of its 185,000 staff. The company says it has taken steps to improve its pay offer and specifically to put in place measures to support the staff most affected by the proposed changes, which of course I welcome. I wonder whether the hon. Lady is aware of that.

[Siobhain McDonagh]

I am completely unaware of what those measures are, because I assure the Minister that at the annual general meeting last week there was a bullish contribution from the chair of the board saying it had done nothing wrong and that it is equalising pay. My concern is that 9,000 of Sainsbury’s most long-standing members of staff will be getting a pay cut from 2020.

[Richard Harrington]

I will send Mr Simon Roberts a copy of the Hansard record of this debate tomorrow and say that the hon. Lady is not satisfied with that answer. I will ask what the details of the improved pay offer are and what measures have been put in place to support the staff most affected by the proposed changes. On the face of it, I welcome what has been done, but it may be that this is not exactly as Sainsbury’s says it is. The company says it is committed to increasing its hourly rate of pay from £8 to £9.20 an hour from September and it has promised top-up payments from 18 months to support what it says are the “small minority” of Sainsbury’s employees whose loss of certain benefits will have seen them worse-off overall under the pay deal.

In conclusion, I thank the hon. Lady again for giving the House the opportunity to debate these important issues. It is absolutely right that companies approach pay and reward holistically and that executive pay aligns with wider pay and reward. I think the new reforms that Parliament has approved will help in that regard, while keeping the UK a world leader in corporate governance.

Question put and agreed to.