High executive pay 'corrosive' to the UK economy, report warns

High Pay Commission has the ear of business secretary and its recommendations highlight need for action on top salaries

The Guardian, Allegra Stratton, political correspondent, Tuesday 22 November 2011

Business secretary Vince Cable said that he welcomed the High Pay
Commission's report. Photograph: Andrew Winning/Reuters

Government action to curb boardroom pay becomes more likely as an influential group with the ear of the business secretary, Vince Cable, publishes proposals to reduce the pay gap.

Warning high pay is "corrosive" to the UK economy, the High Pay Commission calls for greater transparency in the setting of executive pay and says employees should sit on remuneration committees. Its recommendations come in the most comprehensive report yet on the need for action on top salaries.

The report shows executive pay has risen sharply – the pay of the head of Barclays is up nearly 5,000% in 30 years – while average wages have increased just threefold.

The commission was set up by the leftwing pressure group Compass and backed by money from Joseph Rowntree Charitable Trust. A government source said on Monday, however, that the work was being taken seriously.

The commission sets out 12 recommendations to tackle high pay. The main reforms include:

• Greater transparency in the calculation of executive pay to end the "closed shop" on pay decisions. At present, many people do not understand until it is too late how a vast salary – often composed of as many as seven different elements – is worked out.

• Putting employees on remuneration committees, a move included in the government's own consultation remit.

• Publishing the top 10 executive pay packages outside the boardroom.

• Forcing companies to publish a pay ratio between the highest paid executive and the company median.

• Requiring companies to reveal total pay earned by the boardroom members.

• Establishing a new national body to monitor high pay.

In his speech to the Liberal Democrat conference in September, Cable launched a consultation into the issue and was attacked by figures including John Longworth, the new director general of the British Chambers of Commerce (BCC), who called it a "hobbyhorse project". On Monday a Lib Dem source said they had worked closely with the commission, were unsurprised by its recommendations and would be taking action."Put it this way, this report is not going to be kicked into the long grass," the source said.

Lord Newby, a Lib Dem peer, is one of the commissioners. The business secretary has met the commission several times and 10 days ago said he had "sympathy with the emotions" of those campaigning outside St Paul's Cathedral.Conservative officials in Downing Street are also minded to act, believing the government has struggled to keep pace with public opinion and risks being outflanked by the Labour leader, Ed Miliband, on the issue of probity in the City. The debate in government sees some Conservatives pushing to ensure any new regime allows for best performing members of staff to see it reflected in their salary.

Cable said: "Many of the options we are consulting on are reflected in the High Pay Commission's final report and we welcome their contribution to this important debate. The government will announce next steps early next year. In the last decade we have seen extreme increases in top executive pay which appear to be completely unrelated to the performance of companies. They are therefore acting against the interests of shareholders and consumers.

"There is widespread consensus, not just among the public but in the business community, that this is unacceptable and is undermining the credibility of our markets-based system.

"What I'm working towards is responsible capitalism where rewards are properly aligned with performance."

The last suggestion, establishing a body, is not deemed necessary either by the government or the opposition and Cable's office is currently weighing up which of the suggestions contained in theconsultation need fresh legislation or whether the majority of reforms can be simply inserted into codes of practice. The commission's report is the most authoritative set of proposals yet published and will meet with approving noises from inside Whitehall. The report, Cheques with Balances: Why Tackling High Pay is in the National Interest, has taken a year to compile and includes fresh evidence of runaway executive salaries over the last 30 years as workers cope with wage freezes.

The commission shows that the former chief executive of Barclays John Varley earned £4,365,636 last year – 169 times more than the average UK worker – an increase of a 4,899.4% since 1980, when the top pay in Barclays was just 13 times the average. The pay of the chief executive at now state-owned Lloyds Bank has increased by 3,141.6% to £2,572,000 over the same period – 75 times the average Lloyds employee. In 1980 it was just 13.6 times that of the average Lloyds worker.

Average wages in the UK today are £25,900 - up from £6,474 in 1980.

The report says: "Stratospheric increases in pay are damaging the economy – distorting markets, draining talent from key sectors and rewarding failure. There appears to be little truth in the myth that pay must escalate to halt a talent drain in executives."

Cable has said repeatedly in recent weeks he would like to introduce legislation next year to curb executive pay. Cable is consultating on what shareholders could do to moderate pay and theinquiry is due to wind up on Friday. The consultation paper suggests including the idea of giving shareholders additional information about how additional pay is related to pay levels elsewhere in the workforce. A separate proposal suggested that companies provide "fuller information on the relationship between pay and company performance."

Cable wants to encourage long term caution rather than salaries that reflect short term risk.

Deborah Hargreaves, chair of the commission, said: "There's a crisis at the top of British business and it is deeply corrosive to our economy. When pay for senior executives is set behind closed doors, does not reflect company success and is fuelling massive inequality, it represents a deep malaise at the very top of our society.

"The British people believe in fairness and, at a time of unparalleled austerity, one tiny section of society – the top 0.1% – continues to enjoy annual increases in pay awards. Everyone, including each of the main political parties, recognises there is a need to tackle top pay. That's why we are saying there must be an end to the 'closed shop' that sets top pay and that pay packages should be clear, open and published to shareholders and the public."

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