Introduction of a Maximum Wage

Lord Vaizey of Didcot Excerpts

Tuesday 10th February 2015 Westminster Hall

[The Minister for Culture and the Digital Economy (Mr Edward Vaizey)]

It is a great honour to appear under your chairmanship, Mr Streeter. I thank the hon. Member for Inverclyde (Mr McKenzie) for calling this important debate. I am grateful for the contributions from the hon. Member for Strangford (Jim Shannon), who explained why he could not remain in his place, and the hon. Member for Coventry South (Mr Cunningham).

I congratulate the hon. Member for Hartlepool (Mr Wright) on his reasoned response on behalf of the Opposition. Of course, I cannot resist echoing the comments of his predecessor, Lord Mandelson, who said, while in government, that the Labour party was

“intensely relaxed about people becoming filthy rich”,

which perhaps provides some of the context for the debate. Indeed, those comments were echoed by the Labour party’s education spokesman, the hon. Member for Stoke-on-Trent Central (Tristram Hunt), who went on television on Sunday to talk about how the party was “aggressively pro-business”, because it may unwittingly have given the impression over the last few weeks that it is opposed to businesses and keen to burden them with regulations.

When Lord Mandelson was in government, the ratio of top pay to average employee pay increased from just 47:1 in 1998 to a peak of 151:1 in 2007. I am pleased to say that it had fallen back to 121:1 by 2013. That reflects the fact that the average total remuneration awarded to FTSE 100 CEOs fell by 5% in 2012 and by a further 7% in 2013.

Those cheap party political points aside, may I say that I have a lot of sympathy with the framework of this argument? We live in a civic society, and it is important people feel that they are part of a community, that they will be rewarded for the work they do and, just as importantly, that people are not remunerated for work in a way they perhaps do not deserve.

Philosophically, it is important to reflect on how public opinion views very high pay. For example, the football fans among us might not baulk too much at the pay of a top striker, defender or even manager in the premier league; indeed, some fans might say that any pay is possible, as long as the team gets the best person. However, that view is balanced by the fact that, to a certain extent, a footballer or other sportsperson has nowhere to hide; they are paid according to their performance on the pitch, and we can all assess that, so they are as vulnerable as anyone else to being dumped unceremoniously when their performance falls short. However, when we see some top executives being paid significant sums—or, even worse, leaving a job with a significant golden farewell—that sometimes impinges on our sense of fair play.

I say that because I am conscious of the fact that the Government have made efforts to reflect some of the public’s concerns. Indeed, the debate takes place against the background of significant allegations against HSBC about running a tax evasion operation. It also takes place on the day the Prime Minister has rightly sent out a message to chief executives that they should share the proceeds of growth and reflect in the wage packets of the people who work with them the fact that the economy is now growing.

[Mr McKenzie]

The Minister mentions the revelations about HSBC in the last few days. Is that not a prime example of people taking excessive risks in pursuit of that elusive excessive pay?

[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.]

[Mr Gary Streeter (in the Chair)]

Order. There is a Division in the main Chamber. Unless the Minister can wrap up in two minutes, which he may not want to do—and that is fine—we should adjourn and come back in 10 minutes.

[Mr Vaizey]

indicated assent.

[Mr Gary Streeter (in the Chair)]

The Minister is happy with two minutes.

[Mr Vaizey]

I think we have had a good debate. There are other important issues, such as remuneration committees, the Labour party’s “make work pay” policy and the minimum wage, but I hope I have been able in the few minutes I have been on my feet to show that the Government take the issue seriously. We believe we are making progress. There will always be the opportunity for the Opposition to tell us to go further, but—ironically, given the title of the debate—we are perhaps finding more common ground than people might have anticipated.