Whole Company Pay Policy — House of Commons, 2018-07-16
Topic: Government Operations
Richard Harrington (Conservative, Centre-right): I absolutely agree, but pay is earned for several reasons. Hard work is definitely one of them. I am not comparing ourselves, but we are all here at 11.40 pm, so no one could say that we are not working hard. The dispute would come from the second reason for pay, which is how well someone is working and the their responsibilities. I would not ask the hon. Gentleman to intervene to say how well he thinks I am doing, but I certainly know that he and the hon. Member for Mitcham and Morden do a good job. I am not making light of the situation; I mean that reward is partly based on how well someone is doing and partly on how hard they work, but part of it is about responsibility. We would all agree that chief executives have a lot of responsibility, and they should not have job security because they are putting themselves on the line for workers, shareholders, banks or whomever it might be. This is a question of extent and of how much reward is performance related and how much of it is a basic salary. I hope that the hon. Member for Mitcham and Morden and the hon. Member for Strangford (Jim Shannon) do not think that I am trying to make light of this, because there is a significant issue here We may disagree on this, but I think the answer lies with transparency and accountability in how executive pay is set and in how it fits with wider employee pay and incentives. The Government have introduced major reforms on executive pay, and the first package in 2013 and the second package approved by Parliament just last week are important. The 2013 reforms compelled quoted companies to disclose each year the total pay and benefits of their CEOs and directors and to explain how that relates to company and individual performance. For the first time—this is important—we gave shareholders a legally binding vote on a company’s executive pay policy, with which all payments to directors must comply. Taken together, the two reforms have forced companies to be much more rigorous and transparent in their approach to executive pay However, more needed to be done, in particular to increase transparency and accountability in how pay at the top relates to pay and reward across the rest of the company. It is vital that companies demonstrate cohesion and a comprehensible line of sight between executive pay and the pay of other employees. They are all part of the company, and part of its success, and a confident organisation should be willing and able to explain how its approach to pay is consistent across all its employees. That is why the Government are now implementing major new statutory and code-based reform measures on executive pay as part of a wider package of corporate governance reform The headline reform measure—this is directly relevant to the hon. Lady’s speech—is to require all quoted companies to disclose and explain the ratio of their CEO’s pay to both the median average and the quartile pay of their UK employees. The pay ratio statement must include an explanation of "whether, and if so why, the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole." That will allow shareholders, employees and other interested parties to see how pay in the boardroom relates to wider employee pay throughout the company and, importantly, whether and how the directors of the company believe the differentials are justified. This is not just about employees, important though they are, because shareholders have strongly backed the introduction of pay ratio reporting and will be watching closely both the figures and the explanations, which they have made clear must be meaningful and relevant UK shareholders are increasingly vocal and assertive in holding companies to account on executive pay and other issues, which the Government support. The Government requested the Investment Association to establish the world’s first public register of shareholder dissent, so that there is a publicly monitored record of companies that receive more than 20% votes against executive pay packages. Halfway through the first year, there have been 140 significant shareholder rebellions on pay and other matters—more than the total for the whole of last year The Government have asked the Financial Reporting Council to consult on a number of new executive pay provisions in the UK corporate governance code, including a requirement for remuneration committees to explain what engagement with the wider workforce has taken place on how executive pay aligns with wider company policy. I am pleased to say that this new measure forms part of the revised corporate governance code published by the FRC earlier today—this is very topical—as part of a wider package of corporate governance reforms that require companies to put in place one or more of either a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director. It is complicated, but we are making developments. Companies will have to report on how they have had regard to the interests of employees. The statutory instrument was approved by Parliament last week and requires large companies to report each year on how they have had regard to the interests of their employees and on how it has influenced the decision making of directors All these measures will be in place from the start of January 2019, and I take the opportunity to thank everyone in this House, particularly the Business, Energy and Industrial Strategy Committee and the all-party parliamentary group on corporate governance, for their constructive contributions to this agenda over the past two years Before I finish, I will address some of the questions raised by the hon. Member for Mitcham and Morden.