The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson)
I congratulate the right hon. Member for Oldham West and Royton (Mr Meacher) on securing this debate. I am grateful that we have the opportunity to discuss this important matter, and I thank the Backbench Business Committee for allocating the time. On many aspects there is substantial agreement across the House.
The right hon. Gentleman was right to say that concern about the issue is not the preserve of the political left. The Government—not just my party, but my coalition partners—have understood that concern. The very concept of rewarding failure shows that markets are not working as they should. From every political perspective, we want to make sure that people are properly rewarded for doing well and are not rewarded for failure.
There is concern that levels of directors’ pay have ratcheted upwards. At the same time the link to company performance and wages at other levels in the company has grown much weaker. That is damaging to the long-term interests of business and it is right that we are acting to address this market failure. That is why we have taken decisive action to restore the link between top pay and performance in UK public companies.
The reforms that we introduced, which came into force last October, create a more robust framework for the setting and reporting of directors’ pay. They have boosted transparency so that what people are paid is clear and easily understood, and have empowered shareholders to hold companies to account through binding votes. They restore a stronger, clearer link between pay and performance, and address the important issue of rewards for failure. Our reforms require companies to report the ratio of average percentage change in employee pay compared with the percentage change in the chief executive’s pay, allowing shareholders to understand whether pay increases apply proportionately to all employees or only to those at the top. They also mean that companies must report on how the pay and conditions of employees informs the remuneration policy for directors, whether they have sought the views of their work force, and how the work force was consulted.
During the debate concern has been expressed about the pay ratio galloping ahead and hugely increasing. Although I recognise those concerns, it is important to set some of the figures in context. The hon. Member for Hartlepool (Mr Wright) mentioned a ratio of 143:1, which I believe is from a report from the High Pay Centre back in August. It is worth noting that subsequent to the initial release of that figure, the High Pay Centre and The Guardian, which had reported it, had to retract the figure because it was found to be a miscalculation. The figure suggested now is 130:1. Another research organisation, Manifest, has suggested that it is 121:1, compared to a peak of 151:1 in 2007. I am not for a moment saying that that is a level that many people would find acceptable, but the trend is not going ever upwards. There seems to have been a peak in 2007 and the ratio is now falling, which I hope hon. Members will recognise and welcome.
Mr Iain Wright
I am glad the Minister has put that clarification on the record. She is galloping away somewhat, rather like executive pay over the past 30 years. May I bring her back to the Government’s reforms? In respect of binding votes, how many companies have had to change their pay policy as a result of shareholders voting against it?
Jo Swinson
I will talk about the particular reforms in a moment. There are two ways in which the Government’s reforms can have an impact on executive pay and, therefore, company behaviour when agreeing directors’ remuneration. One way, obviously, is to have a binding vote that a company could lose, and as a result the pay policy would not go forward. The other way—it is an important one—is that companies, because they know they will face a binding vote on executive pay, will be incentivised to have more detailed discussions with investors and shareholders in advance of the annual general meeting. I would not want us to get into a situation in which we thought that it was only if lots of votes were won that the reforms were not successful, when actually it might be a sign that there is much more engagement, which in itself would be a sign of success.
Mr Meacher
Does the Minister accept that, despite the good intentions of the Business Secretary’s reforms, the fact that they have not actually been exercised suggests that we need to go significantly further and that that is probably because of the excessive influence of very wealthy fund managers and, in particular, because the work force has no say at all? Does she believe that the work force should have some say in executive pay?
Jo Swinson
I certainly think that the points the right hon. Gentleman made about involving the work force are important. That is why our reforms require that it be set out how employees have been involved and consulted. It is not a prescriptive approach, but it requires that to be taken into consideration. Indeed, the Government have tried in other ways to influence corporate governance. For example, the work we have done on employee ownership has supported different types of ownership and engagement models, through various changes to the tax system and the provision of materials on how to make it easier for companies to convert to employee ownership models, so that employees can be much more involved in the running of their companies. We know that that can have real business benefits, because employees buy much more into the success of the company. That also starts to deal with some of the productivity issues that the hon. Member for Hartlepool mentioned.
Mr Wright
The Minister is making a very important point, and I really agree about the need to ensure that employees have a say in the running of their businesses, because that improves the value of those companies. Could that be formulated within corporate governance? Does she agree with the notion of having employees on remuneration committees?
Jo Swinson
I think there is a difference between recognising and supporting business benefits, and prescribing in legislation or regulation exactly how companies should go about doing that. There is a lot of agreement on the advantages for companies, but I do not think there is much agreement with the idea that the best way is for the Government to be very prescriptive, stating, “This is exactly what companies must do, and this is the only way to do it.” There are different ways in which companies can achieve that level of engagement successfully. It might be through employee representation on the board or remuneration committee, but there are other ways in which that can be done. We should enable companies to find the way that works best for them.
We are monitoring the impact of the reforms we are undertaking in the context of the 2014 reporting and annual general meeting season. We want to understand how companies have interpreted and applied the regulations, what trends can be observed in the remuneration packages that have been put forward and how shareholders have responded. We intend to publish the key findings from that work shortly, along with any policy conclusions that flow from them. We have always said that the policy will remain under review, because we want to see how what we have implemented works in practice.
Of course, it is useful for the Government to take on board and consider interesting proposals made in the House, in the context of looking at how our reforms are actually working. We know from the evidence already available that companies are increasingly responding to shareholder expectations on remuneration. There are positive signs of restraint on levels of directors’ pay and a substantial number of companies have simplified their remuneration policy, linking it much more closely to measurable performance over longer periods of time—that is crucial—to try to get away from the short-termism culture.
There have been reports in the media about rising pay, but often they reflect the impact of previously agreed pay awards. What matters most in assessing the impact of the reforms is what pay is being awarded under the new regime. The latest evidence shows that the median total remuneration awarded to FTSE 100 CEOs fell by 5% in 2012 and by a further 7% in 2013. Some 35% of those CEOs and 30% of the executive directors did not receive a salary increase at all last year. The median salary increase for FTSE 100 executive directors overall was 2.5%. Only 16% of companies gave their directors a salary increase of more than 3%; in the previous year that figure was 25%. The trend shows that pay is coming down, but obviously we will want to look at all the evidence that comes forward before publishing those findings and having a clearer picture.
The right hon. Member for Oldham West and Royton talked about the importance of engaging investors in the process. That ties in closely with the work my right hon. Friend the Business Secretary is doing on long-termism, particularly the Kay review, because investment funds, pension funds and so on have a crucial role to play as active investors. Important campaigning bodies have certainly achieved some success in getting much more engagement from those investors, so that they can properly hold to account the decisions on pay.
On the specifics of pay ratios, overall ratios certainly give us a picture of how things are across the economy, but I suggest a degree of caution about using a ratio between the top and the bottom for paid employees within a company. We considered that very carefully when we introduced the reforms. We decided not to mandate that ratio, as set out in the motion. Transparency is welcome, but we have to guard against potentially misleading information when that is broken down between the top and the bottom.
Obviously, that will depend on what sector the company is operating in and the type of staff working for it. For example, a large investment bank that outsources all its unskilled work could end up having quite a low ratio for pay between the top and the bottom, but a large retailer with a large number of relatively unskilled employees would have a much bigger ratio. The retailer could none the less be paying above the living wage and treating its employees pretty well. It might look as though it is the investment bank that should be polishing its halo, but perhaps that is because it outsources its unskilled work to be done in less favourable conditions. Therefore, we have to be slightly careful about unintended consequences, because some factors could mask what is actually happening. Comparing top and median pay might give a more realistic and meaningful figure. The hon. Member for Hartlepool is right to point out the Liberal Democrat policy in that area—he is undoubtedly an avid reader of Liberal Democrat policy documents, as I encourage all hon. Members to be.
The hon. Member for City of Durham (Roberta Blackman-Woods) raised a number of issues that are very important as part of the discussion on inequality and pay policy, particularly the pay gap for women. At the end of last week we heard the positive news that the pay gap is closing. However, we need to be cautious about celebrating that too much when we still have such a significant pay gap. Let us welcome the fact that it is being reduced, but also recognise that our aim has to be to eliminate it.
The hon. Lady’s concerns about part-time work are also important. There is far too much stigma within the workplace about how valuable somebody can be if they work part time. Very important work is being done by organisations such as Timewise to highlight the fact that people in very senior roles can work part time and do their jobs perfectly successfully, so we should be able to deal with some of those issues.
The hon. Lady also mentioned the living wage. We obviously have the national minimum wage, which is a floor, or a basic standard. Of course, this year we saw the first above-inflation rise in the national minimum wage since 2007, which is very welcome. That gives full-time workers a £355 increase each year. We want that to continue, if possible, without negatively impacting on employment. My right hon. Friend the Business Secretary has asked the Low Pay Commission to look at considering above-inflation rises in the national minimum wage, and we hope that, with a growing economy, that can be sustained. Of course, at the same time we have focused on helping people on low pay by cutting income tax by £800 a year, taking 3.2 million people on the national minimum wage out of paying income tax. We have done a significant amount, but we want to continue by encouraging employers to pay above the national minimum wage and to recognise that it is a minimum. Very profitable and successful companies should recognise their responsibilities to their employees, which might mean that they should be paying more. I welcome the fact that many employers are now turning into a positive the fact that they pay more than the minimum wage and badge themselves as a living wage employer. Of course, they will then be able better to compete for talented staff and get business benefits.
The hon. Lady is right about happiness and well-being. In 2010, the Prime Minister said that the Office for National Statistics would be collecting data on well-being and happiness. That was not met with universal acclaim in some sections of the press. I seem to recall that the Daily Mail was not necessarily delighted by the suggestion. I, for one, was delighted, having set up the all-party group on well-being economics and long campaigned for the importance of recognising that people, yes, care about their income and the size of the economy, but also care about the health and happiness of themselves and their loved ones. The more we recognise that in our policy making and in what we measure, the better.
The hon. Lady said that she did not know what had happened to that work, so I will update her. The ONS has been collecting the information, and about 250,000 people a year are questioned. As a result, a rich databank is being built up that can be broken down in interesting ways across different geographical areas, and between men and women and different age groups, so as to be able to assess the impact of policies and see what is happening in different parts of the country in different groups.
We recently announced the setting up of a “what works centre”—a research think-tank that the Government are supporting to analyse how different policies impact on well-being. From a BIS perspective, one of the key strands of this work is about well-being in the labour market and the workplace and what drives it. We recently published research that we have undertaken on that. A range of factors impact on workplace well-being. Obviously, pay is one, but there are also things such as the variety in someone’s job, whether they feel that they get to use their skills, whether they have a degree of autonomy, how they go about their job, and their sense of fairness in the workplace, which very much ties into this debate. I am glad to say that very many businesses are also engaged in this agenda and recognise that continuing to engage with the well-being of employees leads to better business performance.
We recognise that this is a very significant issue, and we have taken action. We do not want to see rewards for failure. A ratio cap as set out in the motion could, in its purest sense, have unintended and perverse consequences. Early signs of the response to our executive pay reforms are encouraging, and we will review their impact and publish the findings. We will continue to work to ensure that pay policies become fairer, and also support low-paid workers by cutting income tax. I know that we will return to this topic in the House. I thank the right hon. Member for Oldham West and Royton and the Backbench Business Committee for giving us the opportunity to discuss it today.