The first is a story in the Financial Times (£), reporting that the Business Secretary is likely to back down on his proposal that company pay policies should be backed by a ‘supermajority’ of up to 75% of shareholders.

The only good argument against a 75% threshold appears to be the potential for a small group of investors to wield undue influence. However, it is possible to draft the legislation in a way that takes account of this – by requiring, for example, that those voting against remuneration reports represent a minimum number of shareholders, or a minimum proportion of the total number of shareholders. These are already requirements for investors wishing to propose a resolution at an AGM.

By contrast, there are several good arguments for the proposal. The recent high-profile rebellion at CitiGroup, where 55% of investors failed to back the company’s remuneration report, made the news because it was unusual. As the High Pay Commission’s research found, ‘defeat over remuneration is rare – even at the height of the financial crisis only five companies lost the vote on their remuneration report’.

Most investors are extremely passive in their voting behaviour, which means that most overpaid execs will be able to rest easily, knowing that a majority of investors rebelling against their proposal is very unlikely.

The second worrying story is the widely reported view of the CBI that greater shareholder powers would lead to investors ‘micro-managing‘ companies. I’d like to reassure the CBI that they needn’t fret about that: institutional investors typically have holdings in thousands of companies, and so do not have the time to micro-manage anyone.

The CBI should also consider that investors should, perhaps, be somewhat more assertive. Over the last few decades, executive pay has risen out of all proportion with either company performance or employee pay, which leads to perversely motivated executives and undermotivation in the wider workforce.The CBI says that the IDS research which showed a 49% year-on-year rise in top pay has been ‘misread’, but numerous other studies point in a similar direction.

The CBI says it represents British business. Perhaps it is time to remember that the interests of British businesses, and the interests of their executives, are not always the same thing.

Top pay is a case in point.

RBS chair Sir Philip Hampton, for example, argues recent government rhetoric against excessively high remuneration in the private sector dampens business morale and reduces inward investment:

“We need to recognise that businesses have got to succeed and that when they do so people can get very well paid.”

George Osborne weighed in too:

“At stake are not pay packages for a few but jobs and prosperity for the many.”

And CBI director-general John Cridland has attacked the ‘anti-business’ climate, saying:

“If we don’t reward success, business cannot walk the walk.”

But business success and controlling high pay are by no means mutually exclusive. It is possible to argue against stratospheric levels of pay and be pro-business at the same time.

There is strong evidence that excessive executive compensation is associated with firm under-performance. A US study has shown that executive pay is positively correlated with bad governance, which is in turn related to poorer company performance.

This effect is likely to be strengthened by the tendency for a large gap between highest and lowest paid workers to be accompanied by reduced productivity in the workforce as a whole.

As the Hutton review pointed out, a reduction in the ratio between top and bottom pay tends to bring gains in morale and productivity, as well as improved mental health, physical health and dramatically reduced absenteeism.

Partly for this reason, increasing low pay (yet another issue that tends to be painted with an ‘anti-business’ brush) is in fact also likely to act as a boost to businesses.

Not only would raising lower levels of pay reduce the high pay ratios that act as a barrier to increased productivity but, because incentives tend to be more effective for tasks that involve only effort than for those that include a cognitive element, they tend to be more productive at the lower end of the pay scale.
A growing group of politicians do now recognise that fair pay is good business.

Shadow Business Secretary Chuka Umunna pointed out in a recent speech that:

“Just as relative rewards matter as a basis for social comparison among executives, so they matter to other employees too. They matter for employee engagement, and their sense of identification with company goals”.

Vince Cable has recognised that excessive pay is problematic, and last October the PM himself was questioning the wisdom of excessive remuneration, saying:

“Boards have got to think when they are making pay awards, is this the responsible thing to do?”

Nor should we assume that all business people support excessive pay inequality. Ex-Greggs CEO Sir Michael Darrington said that attacking high pay as anti-business is:

“…a smokescreen and a lot of bollocks – it is the greed of the people [at the top] that is anti-business.”

As Sir Michael said, it is those who are attempting to highlight the negative impacts of excessive pay who are “pro-business and anti-greed”.

For example, as research (pdf) by Tim Horton and Howard Reed, published by Left Foot Forward before the general election found, of the £16.5 billion this policy is expected to cost, 94 per cent would go to those on middle to higher incomes – not those at the bottom.

Since then, the deputy prime minister has explored ways of reducing the extent to which the policy provides accidental benefits to those who least need it.

But some issues remain. While Clegg claims his move to push up the threshold will aid “alarm clock Britain” – his alias for Ed Miliband’s “squeezed middle” – it does little to address the hardship faced by those already earning less than the current threshold.

Overall, according to Horton and Reed, three million households in the poorest quartile of the income distribution would not benefit from this policy at all.

Another problem is that for many people, much of the positive impact of lower taxes will be clawed back (pdf) by reduced benefits. Many will see a reduction in their Income Support, Child Tax Credit and basic State pension allowances as a result of being lifted out of income tax.

Clegg’s proposal would increase the take-home incomes of a substantial number of families, but there may be more cost-efficient ways of achieving similar goals, which should also be considered.

Encouraging employers to pay a living wage, (or raising the national minimum wage), would lift many out of poverty. The government could also seek promote accessible training for, and incentives for employers to create, more skilled and semi-skilled jobs.

This would address the so-called ‘hollowing out of the labour market’ as well as mobilising many of those who find themselves stuck in unskilled, service sector jobs propped up by benefits.

Clegg’s solution goes half way to addressing the problem of working poverty, but it goes no way towards addressing the cause.

Many of Cameron’s proposals should be also be welcomed, but they will be insufficient solutions unless they are supplemented with other proposals that go beyond the usual analysis and the usual solutions, to challenge the misleading myths of excessive pay.

My first concern is that the Prime Minister may believe the myth that shareholders are able and willing to tackle “market failure” (as he correctly calls excessive pay). Cameron told Marr that “empowering shareholders” was the “key” solution.

It is true that shareholders do need to be sufficiently informed and empowered to hold companies to account (rather than given a retrospective , non-binding vote on remuneration, as is the case now), and that some shareholders are assertive about executive pay; but many others see their role as short-term ‘traders’ in shares rather than longer-term ‘owners’ of companies.

The vast majority of shares are held via investment management companies, who typically either do not vote on remuneration (or any other issue), or automatically vote in line with management recommendations.

Even the Investment Management Association warned (pdf) that:

There is concern amongst investment managers that there should not be unrealistic expectations about what they can achieve.

Interestingly, Cameron appeared to dismiss one suggestion by Marr which could prompt investors to take their responsibilities more seriously, namely that they should publish their votes on remuneration, so that the rest of us, whose savings they invest, could hold them accountable.

Cameron said that such information is already known, but the work of FairPensions and others clearly shows that this is not usually the case.

The second concern is that although the Prime Minister rightly refers to the mismatch between directors’ remuneration and that of their employees, his solutions appear not to recognise that the performance of companies depends on the performance of the whole workforce, rather than the myth that performance is all about the people in the boardroom.

Cameron was at best lukewarm about the suggestions by Marr that there should be employee representatives on remuneration committees and that companies should report the ratio between pay of directors and employees, relying on an easily-dismissed concern to reject the latter.

If the prime minister is serious about helping UK companies to perform well, he should recognise that pay-ratio reporting and the inclusion of normal employees on remuneration committees would help companies and their investors to consider whole-company performance.

Cameron should also note the Hutton Review’s point (pdf) that companies with lower pay differentials tend to have better-motivated staff – the idea that we have to choose between performance and fairness is a false one.

Such initiatives would also tend to address public concerns that not only are executive pay levels too high compared with company performance, but that the differentials between top pay and employee pay– regardless of company performance – have now reached obscene levels.

If Cameron is serious about responsibility at the top, he should have accepted these three important steps towards transparency and accountability:

1. Investors should should publish their votes on remuneration.

2. Employee representatives should be on remuneration committees

3. Companies should report the ratio between pay of directors and employees

Local authority policies with regard to their lowest-paid staff are polarising between those who are committing to pay Living Wage and those who are seeking to minimise staff costs in the name of keeping taxes low. However, a recent statement from the Royal Borough of Kensington & Chelsea (RBKC) suggests that the benefit to taxpayers of sub-Living Wage pay may be illusory.

RBKC’s Cabinet Member for Finance and IT, Warwick Lightfoot, explained to the local press that the Borough had rejected a motion to pay staff the London Living Wage (currently £8.30ph) on the basis that “if the council and its contractors did adopt the London Living Wage, it could add anything up to £1m to the council’s costs, equivalent to a 1.% increase in council tax”; but in the same interview, Cllr Lightfoot appeared happy for the taxpayer to subsidise low pay through the benefits system, saying that “it is the role of the national government through the social security system to top up earnings in relation to family circumstances”.

Someone uncharitable might suggest that Cllr Lightfoot is more concerned to appear to reduce costs to taxpayers than actually doing so.

The costs to taxpayers of Sub-Living Wage pay are substantial: the Institute for Fiscal Studies estimates that sub-living wage pay costs taxpayers £6 billion each year. The total cost of low pay goes way beyond the direct costs to taxpayers which the IFS calculated: some idea of the scale of the problem can be seen in the Joseph Rowntree Foundation’s estimates that child poverty costs us £25 billion each year, even though 57 per cent of children in poverty have working parents.

Getting a good deal for taxpayers is a noble ideal, but it is not incompatible with paying an amount which will secure “a minimum acceptable quality of life” (as Boris Johnson described the London Living Wage). For example, the London Borough of Islington has brought cleaning services in-house in order to ensure that Living Wages are paid, without increasing costs (mainly by saving on contractor’s fees).

Local authorities should secure good value for taxpayers, but taking a narrow view of who are taxpayers and what is in their best interests helps no-one.

This raises a question of how a progressive government could reduce the UK’s high, growing and unpopular levels of income inequality if the public distrusts tax-and-spend solutions.

There are two answers to that question. The first is to recognise that although the public may not be enthusiastic about redistribution in general, they do favour redistribution away from the top 1%. The majority of voters, including Conservatives, support the 50p top tax rate. The popular support for the idea of reversing the rocketing pre-tax levels of top pay has also been recognised in statements by Conservative, Labour and Liberal Democrat politicians.

But progressives should also recognise that inequality at the bottom end of the income scale can be tackled at the same time as seeking to reduce spending on benefits. This could be done by focusing on the huge cost to taxpayers and the wider economy of companies which pay their low-paid staff at such levels that substantial benefit subsidies are required to make ends meet.

The cost of in-work poverty is huge: The IFS estimates that sub-living wage pay costs taxpayers£6 billion each year. If we examine the wider taxpayer cost of in-work poverty, the picture is even bleaker: child poverty costs us £25 billion each year, even though 57% of children in poverty have working parents.

Politicians have been relatively quiet about the Living Wage recently (perhaps distracted by the staggering increases in top-end pay). This is a shame – there are certainly many more companies who can afford to pay a Living Wage than presently do so (we could start by looking at those who can afford to pay their senior staff unusually large amounts).

While some private sector companies pass the costs of their low pay policies onto taxpayers, some public sector employers are also complicit. For example, there is an increasing trend towards local authorities outsourcing services. It would be helpful if public sector employers published an assessment of the full taxpayer cost of major contracts, so that “taxpayer savings” can be scrutinised, to see if they are what they claim to be.

The below is a joint response to the BIS consultation on Narrative Reporting and discussion paper on Executive Remuneration, co-signed by One Society, Ekklesia, Church Action on Poverty and London Voluntary Service Council (LVSC).

One Society’s full responses can be found here.

Joint response to BIS consultation on Narrative Reporting and discussion paper on Executive Remuneration

Executive pay is a subject which has generated widespread attention in recent months and years. It is good that the Government is seeking views on how the setting and reporting of pay in the private sector can best meet the needs of companies and other stakeholders.

We are keen that the Government, companies and investors should consider the financial, economic and social impacts of pay levels across the workforce and not just those in the boardroom:

There is strong evidence that companies which ensure decent pay and conditions for workers at the bottom of the pay scale1 and moderate differentials between highest and lowest earners2 reap benefits in terms of performance (as well as PR).

The decreasing share of income going to those on low and middle incomes reduces the spending power of this group, which reduces the ability of the economy to recover3. In addition, pay that is below living wage levels creates a cost to taxpayers estimated at £6 billion per year4, not including the costs of income related social problems.

There are numerous health and social problems associated with low income and income inequality. These create costs which are borne by the economy and/or taxpayer.

As organisations which are concerned about the impacts of low incomes, we therefore urge the Government to adopt measures which will encourage companies to report on the differences between the pay of directors and employees and consider the views of employees in matters of pay.

Today we saw one of the most effective anti-capitalist PR stunts in recent memory. But this was not the work of the protesters camped around St Paul’s and Finsbury Square.

I refer to the data released today by Incomes Data Services, which showed that FTSE 100 directors had a 49% year-on year increase in total earnings.

As the BBC pointed out, this is well above the average pay settlements of 2.6% for private sector workers (i.e. average employee pay is falling in real terms, because CPI inflation now stands at 5.2%).

Nor is this a new phenomenon. The equivalent data last year (pdf) showed that FTSE directors’ total earnings were boosted by 55%.

These pay rises are bad for business and bad for the economy, not only because of the PR damage they unfortunately inflict on business in general, but because such high pay rises damage the performance of companies and the economy.

It is often asserted that high pay is necessary to motivate and retain top talent.

However, the facts simply do not back this up: ever-rising pay has not been matched by rises in company performance.

Numerous studies (and the financial crisis) show that stratospheric “incentives can result in a negative impact on overall performance”. The idea that executives will emigrate unless rewards continue to escalate is also unfounded:

“in the last five years only one FTSE 100 company has had its CEO poached by a rival, and that rival was also British”.

Remuneration practice in the UK over recent years sometimes appears to have been conducted in the (discredited) belief that directors are rare super-humans that need to be cherished and pampered, while the rest of us are mere human resources; however, studies (pdf) show:

“The bonus-driven rises in directors’ pay and the falls in employee’s real pay are not just an unfortunate coincidence. Directors can find themselves tempted to suppress wages in order to maximise the short-term profits on which their bonuses too often depend.Wide gaps between top and bottom pay within an organisation harm performance.”

Remuneration committees are also often guilty of such an obsessive focus on the pay and performance of directors that they neglect to “be sensitive to… pay and employment conditions elsewhere in the group” (as the Corporate Governance Code requires). Requiring businesses to report on the ratio between directors’ and employees’ pay and requiring employee representation on remuneration committees will help to counteract this temptation.

The Department of Business, Innovation and Skills is currently consulting about how executive pay is set and reported. This is a great opportunity for the government to put in place polices which ensure that corporate pay practices are in the best interests of companies and the economy, by recognising that the whole workforce, not just the board, are important for successful business.

But Nick Clegg must realise this will have little effect if he doesn’t also work to tackle the underlying cause: the UK’s unusually-high levels of income inequality have a nasty tendency to prevent meritocracy, both sealing people out at the bottom, and sealing them in at the top.

At the bottom, escaping low pay is made highly challenging by the ‘low-pay, no-pay cycle’, which traps significant numbers of people in the kind of low paid, low-quality work that fails to provide the stability needed to make the transition to better-paid, higher-skilled jobs.

Low wages can also prevent young people having the sort of home life that encourages and supports ambition, by causing many parents to work such long hours that family life is damaged. Poverty and tensions in family life are clearly likely to have significant impacts on a child’s academic attainment, promote negative perceptions of work as a route to prosperity, and prevent families from acquiring the necessary savings to fund training or enterprise .

At the top, people are similarly “sealed off”, but for the opposite reasons. The wealthy are able to buy their children the tickets to success (including schooling and savings) and have the right contacts to help them along the way.

Nick Clegg has correctly identified some of the levers by which the children of the affluent monopolise career opportunities (internships being the most obvious example), but unless the effect of income gaps in cutting off the top and bottom from the rest of society are addressed, there will always be tickets to success that are hoarded by some and unknown to others.

As an IFS study pointed out it is:

“…likely to be very hard to increase social mobility without tackling inequality.”

This government does have opportunities to reverse the growing income gap. Vince Cable tackling the growing pay ratios could be one such opportunity; but Nick Clegg is likely to find that efforts to increase social mobility will have very marginal effects unless its causes are addressed.

Miles Templeton, head of the Institute of Directors, is a case in point. His comment on the speech was that it’s “daft” to be talking about curbing executive pay, hoping that it’s just “conference rhetoric” because it isn’t something that would help the UK economy.

It is a sad irony that many of those who argue reducing CEO pay would threaten the economy also insist that raising low pay would do the same.

In reality, there is increasing recognition that that reducing inequalities of income and rebuilding the economy go hand in hand, especially if one recognises that people other than CEOs create wealth, and that they need to be properly rewarded too.

There is widespread concern that growing pay inequality is linked to increased economic volatility, with low income households forced to increase debt levels, high pay and bonuses creating a climate of short-termist risk-taking, and stagnation of pay at a lower level reducing consumption and risking stalling economic recovery in the UK.

So it is good Cable reiterated that whilst “there is absolutely nothing wrong with generous rewards for those who build up successful businesses and create wealth and jobs”, there is a problem with:

“…executive pay which, in many cases, has lost any connection with the value of shares, let alone average employee pay.”

On a less abstract level, there are also positive signs. Vince Cable stated his intention to continue consultations on strengthening the link between pay and performance, and implied an intention to make shareholder votes on remuneration committees binding. He also talked about making details of pay within private companies more transparent, both to shareholders and the public.

We will have to wait for the details. It is disappointing so little was said about Cable’s previously stated suggestion that employees could sit on remuneration committees, and that the focus of the speech was on the weak link of high pay to company performance, rather than the negative effects of high ratios on the wider economy, and on individual companies.

Unrestrained greed, and the inequalities it creates, are not only unacceptable, but are an inefficient way of running our society and economy.

We hope those ideas will emerge from the consultations, and that Cable’s willingness to take on assertions about the principle of fair pay will also lead him to take on those who assert the solutions – such as pay ratio reporting and broadening the membership of remuneration committees – are also dangerous or unnecessary.