I beg to move,
That this House has considered FTSE 100 company pay ratios.
It is a privilege to be under your chairship today, Mrs Moon. I have to be honest and open with the Chamber: I am guilty of trying to dumb down parliamentary proceedings; I attempted to call this debate “Fat Cat Friday”. However, the Table Office pointed out that that would not be correct in the circumstances. I wanted to call the debate that because by lunchtime on Friday 4 January, the UK’s top chief executives had earned more than their average employees would earn over the entire year. Those chief executives take home astronomical figures that are more like telephone numbers than salaries. Although the average employee has seen their salary remain stubbornly low, the pay packets of the FTSE 100 chief executive officers have risen by an average of 11% over the last year alone, soaring to a staggering average of £3.9 million per year. How can that be right, just or fair?
Let me emphasise right from the beginning that I have absolutely no qualms about those at the top being paid well; I appreciate the demands of running one of the UK’s biggest organisations. And I am not, at the moment, calling for a pay cap or a widespread cut to chief executives’ pay. I am calling for fairness—for the importance of the contribution of those at the bottom to be recognised in line with the contribution of those in the boardroom; and for organisations to determine the pay and reward schemes of all employees in one whole-company pay policy.
I will describe in more detail the pay ratios across the FTSE 100, and will consider the causes and consequences of such extreme differences in pay within organisations. Then I hope to detail the reality in some specific organisations, before considering the tangible steps that the Minister and this Government should take to combat such unfairness in the workplace.
Let us start with the FTSE 100. In advance of this debate, Will Turvill of The Mail on Sunday made a remarkable analysis of the pay ratio between FTSE 100 CEOs and the average wage of workers at their firms. Staggeringly, his results reveal that one FTSE 100 company, Melrose Industries, pays its chief executive a completely eye-watering 1,000 times more than the average wage of its employees. I appreciate that this is an extreme example, but few of the other 99 companies on the FTSE 100 index can consider themselves exempt from being similarly unjust.
Even among the FTSE 100, there is inconsistency and disparity. A FTSE 100 CEO is more likely to be called David or Steve than to be a woman or to come from an ethnic minority. What is more, the six female FTSE 100 chief executives earn just 54% of the salary of their 94 male colleagues. However, that is a debate for another day, because it is the FTSE 100 index as a whole that I will focus on today.
Back in the late 1990s, the pay of a FTSE 100 CEO was an extortionate 59 times higher than that of their average employee. If we fast-forward 20 years, it has sky-rocketed to being an eye-watering 145 times higher, and rising. Let that sink in: it means that it would take the median UK worker an extraordinary 137 years to earn a FTSE 100 CEO’s annual pay. Is a chief executive today working that much harder than they did just 20 years ago? The statistics suggest otherwise, as there is very little evidence that soaring CEO pay has incentivised or been the reward of better company performance, because the value of the FTSE 100 has changed little since the late 1990s. However, the pay of FTSE CEOs has increased by 300%. Meanwhile, two thirds of these top firms fail to pay the living wage.
Such mind-boggling figures are difficult to comprehend. To provide some perspective, a FTSE 100 CEO is paid an estimated 132 times more than a police officer, 140 times more than a teacher, 165 times more than a nurse, and an astronomical 312 times more than a carer. These indefensible ratios are a slap in the face for hard-working employees across our country who, at the very least, expect to take home a fair day’s pay for a fair day’s work.
Before this debate, the House of Commons digital engagement team kindly sought the views of the public on this matter. One person said that
“when their employees are working full time and not being able to afford proper accommodation, energy, food, transport or children, suddenly the difference in pay seems rather stark.”
Another person suggested that
“there should be a pay ratio, so if CEOs wish to continue enjoying these luxuries they must ensure that their lowest paid employees are earning a sufficient amount.”
I believe that the pay ratios that I am describing are utterly unacceptable, unjust and unfair. As the executive director of the Equality Trust, Dr Wanda Wyporska, says:
“A society that values its teachers, care workers and nurses at less than 1% of a FTSE CEO is beyond broken”.
Her view is a common one, with an Oxfam survey finding that 72% of people want to see the Government urgently addressing the income gap between rich and poor.
What is causing such extraordinary executive pay to continue soaring? Perhaps it is the fact that former or serving chief executives pack the remuneration committees that set pay levels at large companies; perhaps it is the decline in trade union membership; or, most likely, it is the inaction of the Government on ensuring that fairness is at the heart of the world of work.
These pay ratios stem not just from extortionate salaries, but from extraordinary incentive schemes that are increasingly reserved only for those in an organisation’s boardroom. I must be clear once again: I have no problem retaining incentive pay for executives. However, incentive schemes should be available to all staff on the same terms.
I am sorry for stopping a good speech, but my hon. Friend mentioned incentives; these CEOs also have the incentive of awards, including CBEs. Paula Vennells of the Post Office got a CBE, as most of these fat cats do. They end up getting awards, OBEs, knighthoods and all the rest of it, while the workers are suffering. There are people at the Post Office who face difficulties because of Horizon, a new system that has come in. Good postmasters—good people who are loyal to their communities—have been taken to court, and some of them are now going back to court. Will these CEOs be stripped of their knighthoods and awards?
I thank my hon. Friend for that intervention. I will consider the Post Office a little later in my speech.
Having such incentives for all staff seems like a common-sense way of providing sensible alignment between average workforce pay and executive pay. It is a straightforward, practical idea to have a whole-company pay policy. Let me describe in more detail the reality at specific organisations in the FTSE 100 to illustrate the inequality that grows in the absence of a whole-company pay policy. I will start with Persimmon, whose former boss, Jeff Fairburn, last year received, on the back of Help to Buy, £47 million, which is an extraordinary 882 times the average salary of his workers, before he lost his job. We all remember the backlash when Mr Fairburn was granted a £75 million bonus. In the heart of a housing crisis, do we really think that he should receive such a staggering sum, or should we have seen that money helping young couples who are looking to get on the housing ladder?
How about the owner of Ladbrokes, GVC, whose chief executive, Kenny Alexander, raked in pay that was a huge 484 times higher than the average pay of his workforce? And how about Tesco, whose CEO, Dave Lewis, received a £4.9 million pay packet, which is 303 times greater than the average pay of his employees? Is he working 303 times harder, longer, or better than them?
Then there is Sainsbury’s: a pillar of the Great British high street. Over 148 years, it has established a reputation as a leading retailer and a good company to work for, but its lack of a whole-company pay policy has led to the most disgraceful discrepancy in its staff salaries. Under the guise of an increase in basic pay, 9,000 loyal and long-standing Sainsbury’s staff are set to lose up to £3,000 a year from 2020. They will forgo their paid breaks, the night shift will be shortened, and their Sunday premium will be removed. While those shop floor staff will see their bonus scheme scrapped under these new contracts, CEO Mike Coupe takes home an eye-watering bonus of £427,000 as part of his £3.4 million pay packet, and although the salaries of those staff are crumbling, their bills, mortgages and rent are still the same at the end of each month. I wonder whether Sainsbury’s remuneration committee gave a moment’s thought to those staff when it signed off its executive bonuses. When the board and remuneration committee sit down to discuss what the pay package for Sainsbury’s CEO is going to be, they should also be deciding the pay and conditions for their lowest-paid staff. If they thought about those two things together, there would be a bit more modesty, a bit more honesty and a bit more embarrassment.
Such inconsistency and injustice has grown to become the norm throughout the FTSE 100 and across the high street, with treasured organisations such as Marks & Spencer and B&Q falling foul of the expectation of organisational fairness. The absence of a whole-company pay policy in such organisations has led to unjust disparities. It is at this point that I turn to the Royal Mail.
Of course, examples of those disparities can be found outside the FTSE 100, and I thank the Communication Workers Union for bringing the following example to my attention: since the Royal Mail was privatised by the coalition Government, the pay of its CEO has soared beyond recognition. Before privatisation, the total pay of the chief executive, excluding their golden hello, stood at just over £1 million, 50 times higher than the average wage in the organisation and 78 times higher than the lowest wage. Since privatisation, the chief executive’s salary has doubled; it is now 90 times higher than the average wage and an unjustifiable 123 times higher than the lowest wage. What would have been money for a public asset and its workers is being pocketed for private profit at the very top of the company.
As for Post Office Ltd, things started to change once it was decoupled from the Royal Mail. A postal assistant earns just 3% of the salary of the chief executive, who received a 7% pay rise last year. This is an organisation that is overseeing the privatisation of Crown post offices across the country and the potential transfer of hundreds of Post Office staff to WHSmith, rated by Which? as the worst retailer on the high street. I emphasise once again that I am not calling for a cut to, or a cap on, the chief executive’s salary; I am calling for consistency, parity and fairness across her organisation.
I am pleased to see the Minister here to respond to the debate. She may remember that we met last year to discuss exploitative pay in assignment contracts, which are thankfully about to be abolished, so she has shown that she is willing to listen. Let me assess the further steps that could be taken to bring fairness back to the world of work. In August 2017, the Prime Minister described the “excesses and irresponsibility” of some big business moguls as undermining confidence and damaging the social fabric of our country. If only she had followed those strong words with strong action!
Granted, new rules that will force all UK firms with 250 or more employees to start publishing their pay ratios should be warmly welcomed. However, those figures will be based on the median average of UK employees—that is, the salary of the employee halfway between the top of the scale and the bottom. A truer reflection would be to use the mean figure, taking into account the ratio of the lowest-paid employee compared with the highest. I ask the Minister how that policy will ensure that such extreme pay ratios do not occur in the first place, and what happens if and when they are shown to continue.
As the Chairwoman of the Business, Energy and Industrial Strategy Committee, my hon. Friend the Member for Leeds West (Rachel Reeves), says:
“If shareholders won’t or can’t hold these companies to account, then we will need Government to step in with tougher rules that clamp down on this kind of executive reward.”
Naming and shaming companies, and other piecemeal reforms that rely on organisations’ good will, have proven wholly ineffective. What is more, it is overwhelmingly clear that such excessive and unequal pay ratios are unpopular with the general public and reduce staff morale. The Mail on Sunday revealed this weekend that CYBG, the owner of Clydesdale bank and Yorkshire bank, faces a shareholder revolt at its annual general meeting over excessive bonuses for bosses.
However, we should not wait for isolated pushbacks. I suggest that the Minister takes note of the example of Sweden, ranked one of the happiest countries in the world, where companies with pay gaps face fines if they fail to close them. Furthermore, trade unions should have reasonable access to workplaces, and all FTSE 100 companies should strive to be accredited by the Living Wage Foundation. Most of all, I call for the important contribution of those at the bottom to be recognised in line with the contribution of those at the top, and for organisations to determine the pay and reward schemes of all their employees through one whole-company pay policy. If an incentive scheme is made available for some staff, it should be on offer for all within that organisation, on the same terms. Why should any organisation have a rule for just some employees, not a rule for all?
If a whole-company pay policy does not work, perhaps it is time to introduce a maximum pay ratio at those organisations. In an ideal world, I would not want society to be so prescriptive, but the worsening inequality I have described undermines our democracy, and I believe that our social democracy relies on fairness. It is based on the belief that people will behave reasonably, so when our democracy is not fair, the state must become involved. This is about more than just money, the economy and the world of work. Unfairness at these levels breeds cynicism—the feeling that the system just does not work for the ordinary person—and if that system does not work, why should a person trust in, vote in or participate in it? A lack of fairness produces spiralling disharmony and disaffection in society, and it is our duty as democrats to solve it.
The fact that it takes just three days for the UK’s top chief executives to earn more than the average employee is utterly shameful. After a hard day’s work, the very least that an employee deserves is to take home a fair wage that is in proportion to that of their colleagues. Across the FTSE 100, the absence of whole-company pay policies results in organisations rewarding the minority in the boardroom at the expense of the majority at the bottom. Enforcing or encouraging a whole-company pay policy in those organisations would be a sensible, logical and practical step towards ensuring that all hard-working employees receive a fair deal at work.
It is a pleasure to take part in this debate, Mrs Moon, and I congratulate the hon. Member for Mitcham and Morden (Siobhain McDonagh) on having secured it. It is unfortunate that it is not as well subscribed as I had expected it to be; I had thought that this was a great debate to be involved in, on an issue that matters a huge amount to an awful lot of people who live in all the countries of the UK. I will highlight a few figures, some of which have already been mentioned by the hon. Lady; I will also talk about what we are doing about some of these issues in Scotland, and what we would like to do about them.
The remuneration of FTSE 100 CEOs between 2009-10 and 2017-18, over the course of this Conservative Government, has gone up by 66%, which is a significant increase. One of the interesting stats that I discovered when I was looking into this issue is that in 1980, median FTSE 100 CEO pay was 11 times that of the median worker. By 2010, that had risen to 116 times the pay of the median worker—an absolutely massive increase that surely does not reflect an increased workload of that level. I imagine that those CEOs are not doing 10 times the amount of work they were doing in 1980, and that the people who are working at the bottom of those companies are working just as hard as they were in 1980. An increase in the ratio to that extent cannot be justified.
In 2017, the mean pay of a FTSE 100 boss was £5.7 million. Compared with many people who live in my constituency or throughout these islands, I have a significantly large salary. I am very grateful for that, but even on my relatively large salary, £5.7 million is a number that I cannot even comprehend. It is a ridiculous amount of money for people to be earning.
I understand that the hon. Member for Mitcham and Morden was talking not about the particular salary that those individuals receive but about the ratio, and that is what I want to come on to. The important point about this debate is that it is about equality, and it goes much wider than FTSE 100 companies. We have massive inequality throughout the countries of the UK and much more can be done to improve the situation. When seeking to improve things, I tend to say that we can do so in Parliament, because we have the ability to lead the way as parliamentarians. We often fail, but we have that ability. We also have the ability to legislate to ensure that FTSE 100 companies can lead the way for all companies across the UK in removing the levels of inequality.
It is not only the person on the street or the person working at the bottom of these companies who is unhappy; there is also continuing shareholder dissent. It is important that shareholders are empowered and have the ability to make changes. They are unhappy and there is backlash from them about the massive bonuses and huge pay increases received by CEOs. If we empowered shareholders a bit more, they would have the ability to make those choices to help reduce inequality throughout the companies. Shareholders do not want to be associated with a company that has a CEO receiving a massive salary, massive bonuses and massive pay rises while the worker working on the basic wage is having their bonus scheme removed, for example. It is important that shareholders who have that moral compass can make that mark on the company.
It is important to look at corporate governance legislation and regulations. The changes on reporting the gender pay gap are helpful, but they do not go far enough. It is good that we have reporting on the gender pay gap, but there should be something—not so much a carrot, but a stick—to ensure that the gender pay gap improves. It would be unreasonable to ask companies with a massive gender pay gap to reduce it to nothing in one year, but it would be reasonable for the Government to mandate companies to show progress in reducing the gender pay gap. That should involve not just saying, “This is what we will do about it”, but, “This is the timeline on which we expect to make progress. We will reduce our gender pay gap by 5% in the next two years and reduce it further after that.”
A similar approach could be taken to wage ratios. Companies could be subject to a reporting requirement to submit details on how they will improve the ratio with set targets, and they could be subject to some kind of punishment if they do not meet those targets, rather than them just saying, “This is what we are doing”, but with no set outcomes. That is where a lot of people are on gender pay reporting and ratios.
In Scotland, the Scottish Government have put social justice at the heart of civil service pay policy. Public sector employees in Scotland are paid at least the Scottish living wage, and we have no age requirement for that. Under-25s who would receive a lower minimum wage under UK legislation are eligible to receive the Scottish living wage if they work in the Scottish public sector, no matter their age. We recognise that just because someone is 24, it does not mean they have fewer outgoings than someone who is 25. They could be in exactly the same set-up, renting a flat and with a small child, whether they are 24 or 25. The Government desperately need to tackle the fact that under-25s are being paid less. The Scottish National party has been vociferously making that case at every possible opportunity, including my hon. Friends the Members for Glasgow Central (Alison Thewliss) and for Glasgow East (David Linden) with a ten-minute rule Bill.
The UK Government are not taking the necessary action, so we are asking them to give Holyrood the power to legislate on maximum and minimum wages. That would address the lower end of the spectrum where people should be paid an actual living wage—one that they can really live on, not a pretendy living wage—and, at the other end, maximum wages and bonus payments. We want power over wage ratios. That is not to say that we have a set idea of exactly how we would legislate on high wage ratios, but if Holyrood had the power to do so we could at least have those conversations and consultations. We could come up with a policy that would work for employees, shareholders and the general public. We believe that we are more likely to take action than the UK Government, given their track record. They have not moved as far as we would to tackle inequality in Scotland.
In terms of SNP policy, in June 2018 we had a very good debate at SNP conference about wage ratios. We agreed as a party—our policy is made at party conference—that wage ratios would be one way to tackle inequality and that we would consider it and take it on. An independent Scotland would have a wage ratios consultation and discussion and, if possible, a policy. We would look at the best possible way to do that.
I want to talk a little about the real living wage and employment in Scotland. Employment law is reserved to Westminster, which we have argued against because the SNP and Scottish parliamentarians in general—this view is not reserved to the SNP—have much more respect for workers’ rights, so there is much more likelihood of them improving if we had the ability to legislate in our Parliament. Despite not having power over the issue, we have tried to make changes in our society and, to a limited extent, we have. A lower proportion of people in Scotland are on zero-hours contracts than in any other nation of the UK. The Scottish Government were the first Government in the UK to become a living wage employer, so we are putting our money where our mouth is. We are saying to people, “We are proving that we can do this. We are proving that we will put workers’ rights at the heart of what we do. That is why we believe that Holyrood should have power over that.”
Down here, we vociferously opposed the Trade Union Act 2016. We disagreed with a huge number of things in it. It is incredibly important that we have strong trade unions. If trade unions had the abilities that they previously had, their voice would be heard much more loudly. It would be amplified by the legislation, rather than quashed. Wage ratios would be tackled much more vociferously by the trade unions.
In this Parliament, we have also promoted a Bill to ban unpaid trial shifts, which would give rights to those workers who are forced to work for nothing while doing a trial shift. We promoted a Bill to give workers in precarious work the same rights as employees. It is incredibly important to ensure that they enjoy the same rights as people in more stable employment. In fact, it is even more important for someone in precarious work to have those rights than someone in work that is a bit more stable. That was a good Bill, promoted by the SNP.
Our most recent Bill was on employment rights. It would have stopped gig economy workers and small and medium-sized enterprises getting late payments, which is important for cash flow. Our Bill made clear the importance of someone working in the gig economy being paid on time.
Lastly, I want to talk about what the Scottish Government have done. In Scotland, we have the fairest income tax system in the UK. Some 55% of our taxpayers pay less than they would if they lived elsewhere in the UK. About half of English taxpayers pay more than they would if they lived in Scotland. It is the lowest paid workers, not those at the top, who are paying more in England and less in Scotland. Next year, the top 1% will be asked to pay a little more on their income, and the remaining 99% will pay the same or less than at present. I therefore suggest that the Scottish Government’s policy on income tax is much better and fairer than that of the UK Government.
We are regularly attacked by the Scottish Tories for what we have done to improve fairness in income tax, but since we introduced the Scottish rate of income tax and varied the rates, our economy has grown faster than that of England, so the suggestions that all sorts of chaos would follow have not come to pass. There is a real difference between the actions of the Scottish Government and those of the UK Government. At every opportunity the Scottish Government have pursued fairness and attempted to reduce inequality, and the Bills that the SNP has promoted down here have attempted to reduce inequality in the whole of the UK because workers’ rights are currently a reserved matter.
Holyrood does not have the full range of powers over this matter. We want workers’ rights to be devolved to Scotland. However, given the chaos that is happening and the impact that Brexit will have on the lowest paid in particular, it is increasingly evident that Scottish independence is the only way forward. If Scotland had control over workers’ rights, we would make better decisions than the UK Government are currently making, and that makes the case for Scottish independence ever stronger.
I thank my hon. Friend the Member for Mitcham and Morden (Siobhain McDonagh) for securing this important and timely debate. Such debates expose our politics and the difference between political parties. It is vital that we discuss not only pay ratios, but solutions to extortionate pay, such as an excessive pay levy, and improved collective bargaining for workers through strong trade unions as a way to uplift the pay of millions of workers. It is also crucial that we are able to place the extortionately high pay of FTSE 100 chief executives in the context of low pay and the crisis of work in this country, where millions struggle to make ends meet, and where work is certainly no longer the preventer of poverty, which is a reality for millions of people.
Despite this state of affairs, as was mentioned, by lunchtime on 4 January, the top chief executives in the UK had been paid more than their average employee is paid in an entire year—an extraordinary fact. Every single year, that date and time comes sooner in the year. Unless action is taken, it will be one minute past midnight on 1 January when those people will have been paid much more than their employees. Every year, the Government take no action on that extraordinary fact. Those at the top are increasing their wealth.
I agree with my hon. Friend: perhaps this place should relax a little, because “fat cats” is exactly the right title for those executives who now get 133 times more than the average worker, which means that the salary of the average FTSE chief executive is the same as that of 386 workers on the minimum wage. It is politically poignant to note that some people are not outraged by that statistic. They are quite comfortable with the inordinate, huge salaries of executives who are paid grossly more than those who work for them.
I am sure that nobody would argue—my hon. Friend touched on this—that a FTSE 100 chief executive works 133 times harder than a hospital porter, a cleaner or a caterer. I went on a solidarity protest yesterday with strikers at the Ministry of Justice and the Department for Business, Energy and Industrial Strategy. Let us think about the caterer on exactly £8 an hour fighting for the London living wage. That works out at about £1,280 a month if they work a 40-hour week every single week of the month. If we think of rent, transport, bills and food, that person has a tiny amount to live on every month. I am sure nobody would argue that a FTSE 100 chief executive works 133 times harder than a teacher or a nurse in our NHS, or that they somehow have a combined worth of 386 workers.
The hon. Lady is making an incredibly powerful point. Does it annoy her as much as much as it annoys me that the Tories talk about hard-working families, but they do not mean hospital porters? They mean people who are much higher up the tree. Hospital porters, cleaners, chefs and the people she talks about work incredibly hard every day just to make £8 an hour.
And that work should be valued. It is no coincidence that those people who work really hard, but very often still cannot survive and do not have enough money to pay the bills, get into debt to pay for everyday items—not for luxury holidays, or any luxuries at all. Those people should be at the heart of our concerns in this place. I am mindful never to use the word “earn” when we talk about the pay of the very few at the top. What could they possibly do to earn such large amounts of money?
It is crucial to recognise the context in which FTSE 100 pay ratios are widening. In a stark contrast to the stockpiling of wealth by a few, years of austerity and wage stagnation mean that millions of workers across the country struggle to make ends meet, as I say. In-work poverty is rising and household debt is at its highest rate. Many people rely on borrowing, and one in five workers—more than 5 million people—are paid less than a living wage. That is a huge increase from 3.4 million in 2009. Insecure work has without a doubt become the norm, with nearly 4 million people—one in nine workers—facing uncertainty and worry. They are trapped. To illustrate the low-pay trap, one in four employees earning the minimum wage for five years has been unable to move out of that low-pay trap. Some people do two or three jobs to try to pay the bills, but it has not always been like that.
In 1980, as was mentioned, the median pay of directors in FTSE 100 companies was £63,000, and median pay across the country was £5,400. The ratio of executive pay to the average wage then, less than 40 years ago, was 11:1. In 2002, the pay of a FTSE 100 CEO had shot up to 79 times that of their average employee, and last year it had reached 150 times. This place is doing nothing to stop that runaway train of inequality. I seriously hope that those ratios are unacceptable and completely unjustifiable to anyone. It is particularly obscene that this escalation has come at a time when millions of people are struggling. There is a stark contrast between those two sets of people.
No doubt the Minister will refer to the Government’s reforms to tackle excessive pay in her speech shortly, but I want to make it absolutely clear that under this Government, not only has pay inequality continued to rise, but so has the speed at which it increases. I am proud that Opposition MPs are committed to taking action, because doing nothing is not good enough. When I have been out campaigning, loads of times I have heard people say, “The rich continue to get richer and the poor get poorer. There is nothing we can do about it,” but I fundamentally disagree. Yes, the rich are getting richer, but we can definitely do something about it.
In contrast to the Tories, a Labour Government would ensure pay ratios of no more than 20:1 in the public sector, for example, and we would introduce an excessive pay levy that would charge a 2.5% levy on earnings above £330,000 a year, which is a huge amount, and 5% on those above £500,000. It is estimated that that alone would raise £1.3 billion a year.
I am sure that the Minister will mention that from 1 July the Government will ensure that companies with more than 250 employees will be obliged to reveal and justify their pay ratios. However, there is no obligation on those companies to take any meaningful action beyond the act of publishing those facts. It is yet more empty rhetoric. How is it helpful just to have the injustice out there, without any action to remedy it?
We need practical, political solutions to curb undeserved excessive pay, and to create mechanisms for better income distribution. That is why we commissioned a report by Prem Sikka, published last year, suggesting a range of measures that would apply to the more than 7,000 companies in the UK that have more than 250 employees, accounting for more than 10 million workers. Needless to say, we are looking at the report’s recommendations closely, including proposals requiring executive remuneration packages of all large companies to be subject to a binding vote.
That is just one solution to excessive executive pay. Trade unions are the collective voice of workers, and they have to be central to the debate. They are a huge player in reducing inequality in the workplace, but, after years of anti-union policies, the vast majority of workers have absolutely no say over their pay, conditions or hours of work. Protections that existed before under collective bargaining agreements have been completely lost.
Workers deserve a lot more. Pay ratios are just one aspect of tacking pay inequality. That is why a Labour Government would set up a new Department to roll out sectoral collective bargaining—protecting the interests of workers, strengthening trade unions, and introducing new rights and freedoms so that every worker gets the support, security and pay at work that they deserve.
Surely it is time to end the excessive greed. People are feasting on the backs of workers who are struggling to make ends meet, and who have the gut-wrenching feeling that they cannot afford nappies for their children, even though they work more than 40 hours a week. Surely that cannot be right. The Government must act to end that injustice.
It is a pleasure to serve under your chairmanship, Mrs Moon. I congratulate the hon. Member for Mitcham and Morden (Siobhain McDonagh) on securing today’s important debate. She has a strong, long-standing record of campaigning on behalf of low-paid workers in the economy. I highlight the constructive way in which she approaches working across the House on some of these issues; I know that she secured an Adjournment debate on whole-company pay policy last July.
Executive salaries and pay ratios are undeniably high. Currently, the ratio of the pay of the average FTSE 100 chief executive officer to that of the average UK employee is around 160:1, based on the mean. The median average is 145:1, but it is important to set current levels of pay in a longer-term context. The data shows that executive pay more than quadrupled from the late 1990s to the early 2010s. Pay ratios increased over that period from 47:1 in 1998 to 132:1 in 2010. However, that has stabilised in the last five to seven years, albeit with minor fluctuations from year to year.
The High Pay Centre, which campaigns against high levels of executive pay, acknowledged in its most recent report that UK executive median pay peaked at £4.2 million in 2013, and is around £3.9 million for the latest reported year. That puts the UK on a par with Germany and only slightly above other major EU countries on executive pay levels, despite our quoted companies generally being much larger. In the US, CEO pay is much higher. Median CEO pay for Standard & Poor’s 500 companies in 2017 was around £9.3 million, giving the US a pay ratio of 399:1.
That sets the context, but it is certainly not grounds for complacency. Shareholders and people in wider society have increasingly been questioning how such wide differentials can be justified, both in terms of individual performance and in relation to company pay policy as a whole. The Government share those concerns.
We do not believe that it is the job of the Government to set company pay levels or impose arbitrary caps. However, it is our position that there must be transparency and accountability in executive pay, and that shareholders must have the information and the powers to challenge unjustified pay in the boardroom. That is why we legislated in 2013 to require listed companies to secure binding shareholder approval for their executive remuneration policies at least once every three years, and to disclose every year the total single figure that each director is paid.
It is also why we are continuing to take steps to force companies to disclose and explain how executive pay is matched by performance, and how it relates to wider employee pay. In particular, we recently introduced a new requirement for companies to disclose and explain every year the ratio of their CEO pay to the average pay of their employees. I am pleased that the hon. Member for Mitcham and Morden welcomed the legislation, which came into effect at the beginning of this year, meaning that companies will have to report their ratios when they publish annual reports next year.
Pay ratio reporting will, for the first time, show systematically and clearly how pay at the top of quoted companies relates to pay across the rest of the company. Companies will have to report each year the ratio of the CEO’s pay to both the median and the quartile employee pay at the company. The hon. Lady expressed concerns that the pay ratio was being calculated only in relation to the median; in fact, we require pay ratios to be published for the first quartile, the median and the upper quartile. We thought hard about whether to use the median or the mean, and finally decided on the median as a more robust figure. In part, that was a response to the TUC, which argued strongly that we should use the median. In most cases, we use the median because the result is the bigger ratio.
Shareholders, employees and others will get a clear and consistent picture from year to year of how CEO pay relates to pay across the whole company. Companies will need to explain the reasons for any change from previous years, and any pay ratio trend over time. They will also need to explain whether any change is due to a change in the company’s employment model—for example, if the reason was the outsourcing or offshoring of low-paid workers. Critically, the company will have to explain whether, and if so why, it thinks that the ratio is consistent with the pay, reward and progression policies of the company’s UK employees as a whole.
Those pay ratio explanations will be watched closely by investors, who are strongly behind the new pay ratio reporting, as well as by employees and wider society. Any company that puts forward weak or misleading explanations can expect to face significant shareholder and public criticism. As the Financial Times wrote in 2017 when we announced the plans,
“a single-figure ratio will attract attention. And that will help investors curb companies’ attempts to inflate chief executive pay—and the pay gap”.
Pay ratio reporting is part of a wider package of reforms aimed at making a real change to the level of engagement between boardrooms and employees. That package includes an important new provision in the UK corporate governance code for remuneration committees to consider workforce pay alongside executive pay, and to engage with the workforce to explain how executive pay aligns with wider company policy. It is too early to tell what the impact of the new reforms will be. The Government expect companies to respond positively and creatively to the new requirements, recognising that no one size will fit all and that there will be a variety of approaches.
We are already seeing some encouraging progress, on a voluntary basis, this year. For example, Marks & Spencer has agreed that the chair of its business involvement group, which represents the interests of the company’s 81,000 staff, will be invited to attend two boardroom meetings and at least one remuneration committee meeting each year. We must also remember that pay ratios are determined by average pay in the workforce, as well as by pay at the top, so ratios will fall where average pay increases faster than executive pay. In that respect, the Government are taking steps to boost the wages of working people through our industrial strategy to deliver better-paid jobs across the country, our £37 billion productivity investment fund and our increase in R&D investment to 2.4% of GDP by 2027.
We have taken concrete action for low-paid workers by introducing the national living wage, which is on track to hit its target of 60% of median earnings by 2020. Its introduction marked a pay rise for more than a million workers across the UK and has helped to deliver the fastest wage growth for the lowest-paid in 20 years. In April, we will increase it again to £8.21 by an inflation-busting 4.9%—an increase in earnings of more than £690 a year for a full-time worker, and a total pay rise of more than £2,750 a year since we first brought it in. Up to 2.4 million workers are estimated to benefit.
Real progress is being made for hard-working people. As a working-class Conservative MP—as a Tory—when I speak about hard-working families and hard-working people, I find that I am accused of referring to higher earners. As somebody who undertook many of the jobs outlined in this debate before I came to Parliament, I actually find it offensive that when I talk about hard-working people, I am accused of not referring to hard-working people separated across our economy.
I appreciate the Minister’s honesty. The problem is that when the middle-rate income tax threshold goes up, there are Conservatives who make the case that it will improve life for hard-working families, but very few people in the jobs we are talking about are making £43,000 a year. Maybe the Minister needs to tackle the issue with some of her colleagues.
I thank the hon. Lady for clarifying her point, but I have to say that it is this Government who have increased the threshold year on year. As a working-class Conservative MP, I am proud to say that I am standing up for hard-working people—and when I talk about hard-working people, I mean people who go out every day to earn a living, no matter what sector they are in or what job they are doing.
The Government have responded to the challenging world of work with plans for the biggest upgrade of workers’ rights in 20 years. In December we published the good work plan, which sets out how we will implement the recommendations of the Taylor review. The plan commits us to introducing a right to request a more predictable and stable contract for all workers and to bringing forward proposals for a single workers’ rights enforcement body in early 2019.
The right to request a contract is often signalled as some kind of big victory, but have not workers always had that right? This is nothing new.
We will be making the options to employees clearer. For example, we have already laid statutory instruments to ensure that on their first day, employees are able to get a written statement of their rights. It is about making sure that workers are able to know what rights they have, and that they know that they can ask for that ability.
The Government have also laid legislation that will repeal the so-called Swedish derogation and guarantee agency workers their right to equal pay. After April 2020, agency workers will no longer be able to opt out of their right to equal pay after 12 weeks in the same assignment. In short, we are shining a light on pay at the top and taking action to improve the pay and employment rights of ordinary workers.
I want to touch on a few points made by the hon. Member for Mitcham and Morden. She rightly raised the issue of diversity on boards and gender balance, which the Government are very concerned about. We have started to see results from work on the gender pay gap: we are now at 17.9%, the lowest figure on record. We are working to improve gender diversity on boards, and we have made great progress. The next target and challenge is black and minority ethnic representation—not just on boards, but in the pipeline and among executives in general. That is one of the policy areas in my portfolio, and I take a lot of interest in it.
The hon. Lady asked whether it is right that those in large companies—I think she was referring to companies that are private, but not necessarily listed—are taking large salaries but have not signed up their employees to the living wage. I quite agree that that is not a satisfactory situation, but what is massively important is the highlighting of the issue by the media and wider public, and the transparency that we have enabled so that those companies are held under a tougher spotlight. Customers and suppliers out there who know that information about those companies will need to decide whether they want to deal with them. Things are moving, and it helps that the issue is on the agenda more widely and that more people are aware of what the big bosses are being paid.
The hon. Lady also raised long-term incentive schemes. The data show that long-term incentive schemes linked to valuation and share prices have increased over time, which has contributed to the rise in CEO pay. I absolutely accept her point, but one of the reasons for bringing in pay ratios and specifying in our rules that companies must give an illustration of the breakdown of executive pay is to enable shareholders to take a view. It will also provide real information about how that narrative relates to wider pay structures across organisations. We are hoping that the reforms will give shareholders the tools and powers to hold boards to account, and that they will exercise that right further as the legislation and the changes work their way through.
The hon. Member for North West Durham (Laura Pidcock) raised the issue of pay caps and suggested a 20:1 pay ratio. As I have outlined, the Government do not feel that it is our responsibility, or that we are in a position, to limit what companies can pay their employees. Our role is to ensure that shareholders and stakeholders have the tools to make judgments and hold boards and remuneration committees to account. We believe that the reforms that we have made over time are going some way towards achieving that.
For information, my point about the 20:1 ratio was about the public sector.
I thank the hon. Lady for that clarification. However, I point out that a pay ratio of 20:1 could extend to foreign companies bidding for Government contracts, which would raise state aid and World Trade Organisation issues. There are issues with some of the policies and the refining that she may want to clarify further.
I thank again the hon. Member for Mitcham and Morden, who has taken the opportunity to bring this debate about company pay ratios to Westminster Hall. They are an important means of shedding light on pay distribution within companies and how that is changing over time. Their publication will spur companies and their remuneration committees to give greater thought and show more sensitivity to how pay in the boardroom aligns with employee pay. Along with other reforms implemented by the Government, they will ensure that the UK remains a world leader in corporate governance and an excellent place in which to work, invest and do business.
I have had many conversations with the hon. Lady, and I thank her for the way in which she approaches these matters. As I said yesterday in the Business, Energy and Industrial Strategy Committee, these issues will always be under review and we will always be looking at what can be done to improve transparency and clarity so that the spotlight can be shone on organisations. I look forward to working with the hon. Lady constructively on the number of issues that I know she is interested in in this area over the coming months.
Can I ask for your clarification, Chair? Do I have a minute, or two, because we have not reached the time limit?
You can take as many minutes as you feel are appropriate.
That’s a very dangerous thing to say!
I thank all hon. Members for taking part in the debate. Although there are not huge numbers of us here, as a Back-Bench Opposition MP, the tools that I have to make small changes are sometimes about shame. The fact that we are here talking about this issue, that the House magazine has taken it up, and that Sainsbury’s has already sent me a very cross word about what was in the article, means that we are having some impact. As a Catholic, I completely understand the role of shame in controlling behaviour!
I come to these things as a patriot. I am the daughter of two people who came here in 1947, fleeing a small island that could not support them and could not feed their families. By dint of their own hard work and labour, they made a good life for themselves. I want that for everybody else. I believe that people should work hard. I believe that work is empowering—not just through someone supporting themselves and their family, but to the human spirit and purpose. I think it can be one of the best cures for mental health problems. To have something to do and to do a job well is a great feeling: I am grateful every day to do this job, because I love it and it leads me to do stuff. That is where I am coming from.
Like all Members here, I have an advice surgery every Friday. People come in and I look at their payslips and I think, “How do they live? How do they support their families and pay their rent? How do they get by?” I see that increasing, and I do not think that is what Britain should be about. We should be about reasonableness and fairness and giving people hope for a better future. I want work to pay, and for so many people who work so hard, who work such antisocial hours, in such poor conditions, that is not happening at the moment. Given where I come from politically, I never thought I would agree with pay ratios, but I am coming to the point of thinking that if other things cannot work, we may need to look at them.
Question put and agreed to.
That this House has considered FTSE 100 company pay ratios.