My Lords, in addressing this section of the Bill, I should like to say a few words. I am very conscious of the fact that this is most definitely not a Second Reading debate, but I want to give a little perspective before I get to the main issue.
The amendment deals with directors’ remuneration, a subject which has had a lot of intense coverage in the media. Before we get to the nuts and bolts of the various amendments to which I have added my name, it might be useful if I set out some of the background to our thinking on this issue. I should say at the outset that we are very encouraged that shareholders, particularly pension funds and investment funds, are taking a much more proactive position on this issue. I know it is stating the blindingly obvious but it is the shareholders who own the company and it is they who risk their investment when they buy into a company, yet for too long they have been ignored.
I have to recount a ghastly story about Goldman Sachs that I read some time ago before the financial crash. The story goes that senior management in that company in the United States would look at their profits, decide how much reported profit they needed to keep Wall Street and the shareholders happy, and then divvy up the balance between themselves. I do not know whether that story is true but I am sure that some people take that approach: that is, senior executives act as if they own the company and believe that it is up to them to decide how the pie is sliced, but that is not the way things should be done. To its credit, this month Goldman Sachs responded to the outcry when it agreed not to delay bonus payments in this country in order to gain from the lowering of higher-rate income tax in April. I think that was a good result. Sadly, not all companies have followed the example set by Goldman Sachs. For example, I am told that Tullett Prebon intends to delay bonuses until April. It is on this company’s board that the BIS Minister, Michael Fallon, used to sit. That is not a good example of best practice.
As some noble Lords will know, my background is in IT. For all the faults of that industry, I think it is fair to say that instant gratification by way of monster remuneration is not the norm. By and large, it is about share ownership and share options. The late Steve Jobs was famously known for receiving an annual salary of $1 a year. We have spoken about Amazon today but the owner and founder of that company, Jeff Bezos, also receives a basic salary of less than $100,000—that is, less than a Member of Parliament. I know that in those companies, both those entrepreneurs were already wealthy men but for them it was never about raiding the kitty; it was about capital growth and the long term. Does that not send a positive message to their employees? Their priority is the customer, the product and the service. Get that right and the rest will follow.
It is with much dismay that I see the very opposite in many other sectors of the business spectrum. This very week, we read that RBS intends to divvy up £250 million by way of bonuses, plus a likely fine of £500 million to the US authorities—this is a separate issue—for the bank’s manipulation of the LIBOR market. This bank, where people have been lucky to
avoid criminal prosecution for fixing markets, is one that we own and what is going on is simply wrong. This very day, we read about the very same actions being taken by Barclays, a bank whose record is less than perfect. These executives grab all they can when their company’s trading record is poor and where the shareholder value has remained at rock bottom. Being paid to fail does not sound right to me. In even more disturbing news this morning, the FSA has come out and criticised the mis-selling of complex interest swaps, which particularly hit SMEs that were, in many cases, ill equipped to evaluate their risk and were relying on the good name of the banks that sold them the product. I am not saying that what the FSA has done is disturbing; what it has done is really good, but the practice that was going on is disturbing.
When they come back, what do these well paid executives say? “It is a global employment market. If we don’t get top dollar, we will go somewhere else or to some company that will pay us”. You hear that all the time. The FT hints that RBS executives are threatening it. You can use any word you like to describe this kind of behaviour; my word is blackmail. It is what Premier League footballers do. My advice to anyone who is faced with this gun to their temple is to call their bluff. My experience in business is that no one is indispensable. Just below the great man—and now, increasingly, the great woman—you can bet your boots that there is someone who can step up to the plate.
My party wants fairness and balance. It is worth noting that if the minimum wage had been increased to reflect the average remuneration of FTSE 100 CEOs, the minimum wage would now be at £19 per hour. Instead we have this growing disparity, especially in London where so many leading companies are based and where, in 2011 alone, the top percentile received a 16.5% greater increase than the bottom percentile. Put simply, too many are being left behind and bringing this imbalance back into balance is exactly what my party’s one-nation philosophy is all about. That is the background but let me repeat: we have no problem with high pay. However, we have a problem when this pay is set by a cohort of good old boys who look after each other’s interests. The solution is to make pay transparent and to ensure that remuneration policies are set via the board, in consultation with independent experts and with the shareholders’ explicit approval.
The amendment which I am addressing first, Amendment 58BA, deals with the top 10 and bottom 10 earners in a company. This amendment aims for greater transparency on pay across the whole of the company, so that shareholders have more information when they come to make decisions on pay. It requires that the salaries of the top 10 highest earners in a company, outside the boardroom, are disclosed in a similar fashion. No doubt companies would choose to do this in an anonymous form, with lists of pay bands and the numbers of employees who fall into each band. This would be entirely acceptable and is good practice. Indeed, I have prepared such lists for companies that I have been involved in, where I have been chairman of a public company. It is also the practice in the United States. In some sectors, particularly the banking sector, very high earners exist outside the boardroom, which is why shareholders need these figures for context.
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With regard to the bottom 10, the same practice, with anonymous bands of pay grades, would be similarly reported. That would provide shareholders with the ability to make comparisons about the pay ratios between the top and the bottom so that they can make their own minds up about where they think the ideal ratio lies. These ratios have changed an enormous amount in the past 30 years. For example, at the Lloyds Banking Group and at Barclays, top pay in 2011 was 75 times that of the lowest paid employee. At Barclays in 1979, it was 14.5 times. At BP in 2011, the top pay was 63 times that of the lowest paid employee and in 1979, the difference was only 16.5 times. The point of this amendment is, therefore, to achieve greater transparency, to better inform shareholders and to give them the power to act as they see fit with all the information made available to them.
I now turn to Amendment 58BB on the subject of consultants. This is designed to probe the Government’s progress on this matter. In a speech towards the beginning of last year, Vince Cable said that the Government were going to take action on this and in Committee on this Bill in the other place, it was suggested that action was indeed being taken. That may well be the case and I would be grateful if the Minister could update us. However, for clarity’s sake, I will go over the reasons why this is an important area for us to address.
There is now a large body of academic work spanning several decades that suggests that remuneration consultants have played a significant role in forcing up pay. One reason for that is purely logical. By compiling pay surveys for companies that list the amounts paid by competitors by percentile, wages are forced up. That is for the simple reason that no company wants to be paying less than its competitors. As a statement of where they are as a company and of where they want to go, it is unlikely that they will make an offer of remuneration towards the lower end of the scale. As long ago as 1991, an academic study described that as well meaning actions that would lead to unwarranted compensation increases.
There is little that can be done about that but of greater concern is the potential practice of cross-selling. That is where firms that sell remuneration advice to companies also sell other unrelated management consultancy services to the same company. That provides a clear conflict of interest and, in the past, major investors, such as the Association of British Insurers, have asked for more transparency, citing frustration with the role that consultants have played in the upward ratcheting of executive remuneration. In the United States, the SEC has moved to legislate for increased transparency in the role that consultants play. The amendment here is in a similar vein, requiring more transparency and more information to be made available to shareholders. In that way they can see more of the process that goes into the number in front of them when deciding how to vote. Finally, and in keeping with my party’s policies, by adopting these amendments we can start to create a one-nation approach that works for everyone. I beg to move.