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Companies: Pay Increases

Volume 704: debated on Thursday 30 October 2008

asked Her Majesty’s Government:

Further to the answers by Lord Jones of Birmingham on 28 January (Official Report, cols. 435–36), what advice they have given to companies in the private sector on pay increases; and what controls they propose to introduce.

My Lords, pay levels in private sector companies are a matter for those companies. The Government have consistently made it clear that there should be effective linkage between pay and performance and that exceptional rewards for mediocre performance are not in the interests of companies, their shareholders or the United Kingdom as a whole.

My Lords, I thank my noble friend for his reply, which showed a mild advance on that given by the noble Lord, Lord Jones, to the same Question in January. Does he not agree that the obscene rises in rewards, bonuses and the like for corporate executives in recent years mean that the voice of fairness must now be heard inside the remuneration committees of companies and similar bodies? Does he not also agree that the Government must consider, urgently and immediately, some control over the membership of remuneration committees of all public companies in the longer run and, in the short run, of those companies in which public money has been invested for shares?

My Lords, of course the Government agree with a great deal of what my noble friend has said. In its letter, the Financial Services Authority has made it clear that for banks, pay—and particularly bonuses—must be related to performance. If it is not, the Financial Services Authority will take into account a bank’s position in relation to where it receives government support.

On the more general issue of companies, from 6 April next year, a new provision will require quoted companies to report in their directors’ remuneration report on how they have taken pay and employment conditions into account when setting directors’ pay. Directors’ pay should be set only by non-executive directors, not by those who benefit from it themselves.

My Lords, over the years I have often asked Questions about how unsatisfactory it is that people who perform very badly can still get great bonuses, and the answer has always been that that is in the contract. Why can contracts not include penalty clauses as well as bonuses? The public are very dissatisfied that the BBC employee who is suspended—I think that is the word—is going to earn £16,000 a day for doing nothing on a pretty regular basis. There is great public dissatisfaction with rewards for bad performance.

My Lords, I am not sure that the issue surrounding Jonathan Ross is about bad performance; it is about one particular incident which is currently being examined, so I do not think we ought to rush to judgment. It is a matter for the BBC and, as the nation is showing, it expects the BBC to make a response to the errors which have occurred.

On the more general issues, is the noble Baroness asking the Government to have a legal position to interfere with contracts in private industry and set penalty clauses, or is she seeking to show that public opinion expects good performance only to be rewarded? On the latter point, I am with her entirely, but on the former point she will recognise just how difficult it would be for such a concept to work.

My Lords, does the Minister not accept that his Answer to the noble Lord, Lord Wedderburn, was exactly the same as the countless answers that have been given over the years by people in his position? Does he not accept that the world has now changed? Does he not also accept that, bearing in mind that the Government are now a major shareholder in many of our financial institutions, we need a much clearer statement than we have had hitherto as to exactly what they mean when they say that they want restraint in executive pay and bonuses in those institutions?

My Lords, that is the burden of the role of the Financial Services Authority in relation to the banks. It has indicated in its letter that it will expect the remuneration of senior bank employees to relate to performance, otherwise the authority will use powers that it has to operate sanctions against banks. Although I take some comfort from the fact that I am in line with what predecessors have said from this Dispatch Box in representing my own Government, I say that we are in a new situation and the Government expect, particularly with regard to banks and the financial sector, an improvement in the relationship between performance and pay.

My Lords, if one does not get paid for a poor performance, then half the Arsenal football team will not get paid for what it did last night. Is not the problem now how we define the private sector? I do not know whether my noble friend will able to answer the question. With all these banks now receiving all this money, are they now in the private sector or the public sector? I do not know what the National Statistician says, but to those of us who tried to follow what the noble Lord, Lord Wedderburn, said, it looks as if they are in the public sector, in which case they ought to follow precisely public sector pay guidelines.

My Lords, my noble friend is being a little unfair on Arsenal footballers; they just came up against a superior force in fitness in the last 10 minutes. The Financial Services Authority is of course concerned particularly about those banks in which the Government have made a significant input of resources and about exercising powers with regard to that. However, as I said in response to the noble Lord, Lord Razzall, from the Liberal Benches, the Financial Services Authority is concerned not just about those banks, but the banking and financial sector as a whole. It has made it clear in its letter that, where the companies concerned require government support, that support will be conditional on the Financial Services Authority examining the reports on directors’ pay that the firms have to produce, and that, where they reflect unsatisfactory circumstances, the FSA will act.

My Lords, does my noble friend agree that, in circumstances in which many ordinary workers in financial services are now facing unemployment, if nothing is done about these very high bonuses and rewards for senior people, it will have an adverse effect on the way the public view the present situation?

My Lords, I understand the point that my noble friend makes, but she will recognise that the whole banking system has been shaken by the developments over the past few months. That applies to the highest paid as well as to other workers. She is right that many workers who have no direct responsibility for the catastrophic decisions that were taken will pay the price, but the House will appreciate that some very significant lessons have been learnt by the banking and financial sector—and the Government have indicated that they intend to monitor the situation closely.