Lib Dems back High Pay Commission’s proposals to curb excessive executive salaries

by Stephen Tall on November 23, 2011

The High Pay Commission, an independent inquiry into top pay in the private sector, published its final report yesterday. Here’s how The Guardian reports its key conclusions:

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.

The paper reports that Lib Dem business secretary Vince Cable is likely to be very sympathetic to the Commission’s proposed reforms, having met with them several times: ‘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.’

One of the members of the High Pay Commission was Lord (Dick) Newby, Co-Chair of the Liberal Democrat Parliamentary Treasury Committee, and he has issued an unambiguous statement of support:

“The excessive rises in executive pay are clearly unfair. They bear little or no relation to improvements in long-term company performance. This is particularly corrosive at a time when millions of workers are feeling the pinch.

“This report underlines the urgency of the work that Lib Dem Business Secretary Vince Cable is doing to bring rewards back into line with performance.

“As a Liberal Democrat, my overriding priority is to stop top pay spiralling to ever higher levels and to reduce the often obscene differential between top pay and the salaries of the vast majority of employees.

“It is crucial that the proposals are now adopted by the Government without delay.”

Vince’s statement was a little (only a little) more constrained:

“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.”

I count myself an economic liberal, a believer in regulation-lite government. But Vince Cable’s moves appear shrewd to me, founded on three fundamental tenets of a free and fair market economy:

  • Transparent information on executive pay, including how top executive pay relates to median employee pay, enabling shareholders to become more involved in the oversight of companies;
  • The clear alignment of remuneration with performance — as Graeme Archer suggests in the Telegraph: ‘Make every listed company publish the ratio of their CEO’s salary to that of their lowest paid employee. Plot that ratio over the last five years, against the share price over the same period.’
  • Pay structures that reward long-term and sustainable corporate growth, rather than salaries/bonuses that reflect short-term risk.

Liberals do not believe in a market free-for-all, recognising that the perfect free market in reality does not exist; that government intervention is needed to ensure a level playing field, with low barriers of entry and easy access to information. The party’s support of the High Pay Commission’s proposals seem to me entirely consistent with a liberal approach to market economics.

And, incidentally, a further reminder of why the party was 100% right to go into Coalition — does anyone seriously believe a Tory business secretary would be touching this report with even the longest imaginable bargepole? Me either.