Enterprise and Regulatory Reform Bill

Lord Kerr of Kinlochard Excerpts

Monday 11th March 2013 Lords Chamber

[Lord Blackwell]

That is precisely my point. I would have thought that the company that successfully employs lots of people at all skill levels, including those on the minimum wage or at a low-skill level, is helping society and helping us all to prosper together.

Another example is a company in a consultancy that employs only PhDs. The ratio between the top and the bottom in that company may be relatively small. Is that a better company than one that employs lots of people on the minimum wage? I think that this information is almost entirely irrelevant to any judgment about whether the pay at the top of the company is appropriate. That is a relevant question, but this information is potentially misleading and potentially encourages those viewing the annual report to take a misguided view of the appropriateness of the pay policy within the company. I do not think a case is being made for it.

[Lord Kerr of Kinlochard]

My Lords, I understand the general points made the noble Lord, Lord Mitchell, and I have considerable sympathy for them. However, I do not understand their relevance to Clause 71, which is about remuneration reports. The problem with remuneration reports is that the degree of detail now required in them means that they have become rather long and complex. An additional requirement to include a comparison between payments made to two categories of staff, neither of which is within the scope of the remuneration report, would add further complexity without the justification of relevance. Remuneration reports are about the remuneration of directors and senior executives. The amendment calls for the inclusion of factual material on individuals who are neither directors nor senior executives.

Such complexities have costs. Take two plcs with 70 and 100,000 employees across the world in, say, 50 to 85 countries. I am thinking of two examples which I know well. Is it really necessary, for the purposes of the remuneration report, to require them to establish with each of their businesses in each country where they operate which are the lowest pay rates paid, presumably to the most junior, temporary staff of that country, then take appropriate exchange rates and try to work out the unluckiest 10 in any of their operations anywhere across the world? The remuneration report is about the directors and senior executives. The purpose of a remuneration report must surely be to explain to shareholders the company’s remuneration policy and the result that it has produced for the senior individuals that the report is required to cover, and to do so as simply and clearly as possible. Would this amendment assist that? I do not think so.

[Viscount Younger of Leckie]

Amendment 84AHAA seeks to require that companies report on high and low pay outside the board. Taking high pay first, the issue of high pay outside the boardroom is most relevant in the financial services industry, as was mentioned earlier, where poorly designed remuneration structures can incentivise excessive risk-taking. We remain committed to having the most transparent financial centre in the world and we have already taken significant steps forward. During ongoing negotiations with Europe over new regulations for the banking sector, we have argued strongly for further improvements to the disclosure of pay below board level. As a result, the current EU proposals would require banks to disclose the aggregate pay of senior managers and material risk-takers in bands, as well as further information about how much is paid in total in fixed and variable pay. We await the outcome of these discussions before deciding whether additional UK regulation is necessary.

The noble Lord, Lord Mitchell, raised the issue of disclosure of pay below board level in banks and asked why the UK does not regulate. We argue that it does not make sense to proceed with UK regulations until we know the precise details of the European rules. Once this is confirmed, we will decide whether we need to go further. It is not a major issue in other sectors. In our consultation on this, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden and so we will not pursue this. The noble Lord raised the issue of pay below board level in non-banking sectors, which we acknowledge is an issue. In the end, pay reports are produced for shareholders, so they should be designed to include information that they want. We should not clutter them with information that they do not find useful. Shareholders and the Government share the view, however, that high pay below board level is not a major issue in other sectors. In our consultation, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden, so we will not be pursuing it. That point was made eloquently by the noble Lord, Lord Kerr of Kinlochard.

One matter that shareholders are increasingly interested in is how board pay relates to that of the wider workforce. That is why companies will have to say more about how they have considered pay across the whole of the company workforce. They will also be required to publish the percentage increase in pay of the chief executive officer compared to that of the workforce. I can directly answer the question raised under the previous amendment by the noble Lord, Lord Lea of Crondall. It is something that investors are asking for and is comparable across companies, but we have no plans to mandate that companies adopt a standardised ratio for top to median pay because it is clear that this measure has limitations. It is difficult to compare between different companies and sectors. For example, an investment bank with many highly paid staff will have a much lower pay ratio than a supermarket.

New regulations will implement these proposals. Noble Lords will have the opportunity to debate these regulations later in the year. I conclude by making an overarching general point about trends in pay. It is pleasing to note, although I acknowledge that there is still much work to do, that in 2012 several firms, including Aviva, WPP, Centamin, Pendragon and Trinity Mirror failed to win majority backing for their pay reports, with several senior executives stepping down in the face of shareholder opposition. Voting results from AGMs in 2012 suggest that the average vote against the remuneration report was 8.9%, up from 6% in 2011. So, there is more work to be done but the trends are going in the right direction. I therefore ask the noble Lord to withdraw his amendment.