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§ Mr. Hugh Dykes (Harrow, East)Mine is the last but not least of the Easter Adjournment topics. Perhaps I have the credit of having chosen the most obscure title. Hon. Members may wonder what the title is getting at. I hasten to add that the construction of the words in the title was not my own, quite rightly according to the usual procedure and custom. I wish to raise the question of top executive salaries that top directors of companies pay themselves and the need for them to show self-restraint.
I declare an interest in several business activities outside the House, which are listed clearly in the Register. I do not need to go into them in detail and take up the time of the House. I am second to none among my colleagues in being a champion of the virtues of free enterprise, good business, business success and commercial activity. I pay tribute to the way in which the Government have encouraged that by their philosophy and been successful since 1979 in bringing about a dramatic transformaton in business practices and attitudes, and in running companies. That has stood the country in good stead and achieved for it a considerable reputation abroad.
I thank my hon. Friend the Under-Secretary of State for Employment for coming to the House for the last of these Easter Adjournment debates. I hope that I have not delayed him in going to his constituency. I am grateful to him for coming from the Department to give some answers to my comments.
It is apposite that this subject should be raised from the Conservative Benches because we have a record as a business-oriented party, and the Government espouse free enterprise. I have never been so partisan in politics that I believed that trade union reform could come only from the Conservative party and business reform only from the Labour party in a divided political society. I also pay tribute to the Government for the way in which they have taken side by side the reform of trade union abuses—particularly in the earlier years of this Government —with the need for companies to put their house in order and indulge in better practices, and for stronger legislation on directors' responsibilities. All the companies legislation in recent years has created the necessary balance.
It is particularly interesting and relevant to raise this matter on the Conservative Benches because of growing anxieties about the excessive amounts that some chief executives, chairmen, managing directors and leading executives of companies pay themselves. I deliberately say "some" because of the way in which mechanisms work on company boards of directors and the generally welcome and impressive self-restraint that most directors have displayed, particularly those in charge of fixing their own emoluments.
I have noticed that, in recent years in particular, that has become a matter of great concern to the Government. I remember my right hon. Friend the Prime Minister's dramatic response to complaints about the excessive remuneration—if that is a fair phrase—of, for example, the chairman of British Airways. She specifically referred to that before Christmas in a notable utterance.
In the past few years there have been an increasing number of comments in the press and in journals rather than in the House. That is one reason why I am raising the 1400 matter today. There have some references to it in the House, but only usually from the more stakhanovite Labour Members on the Bench below the Gangway.
Many recent press articles, which I shall not quote because of the lack of time, have shown the growing concern about the subject. On 1 July 1989 The Guardian had an article entitled "How Britain's bosses are taking the rise", with details of the huge pay increases of top executives, chief executives and so on, in the largest 100 companies. On 23 July 1989, a newspaper well known for its support for private enterprise and the free market, The Sunday Times, had an article entitled, "How bosses justify £534,000 a year". It compared the salaries of the 30 highest-paid executives in Britain with the performance of their companies measured by profits and the change in earnings per share.
We know that highly paid executives, to some extent with justification, justify large salaries in terms of what they describe as the international demand for their expertise, but that is often more imagined than real. I do not detect an enormous international movement of senior executives all over the world according to the exact scientific market measurement of the best emolument and remuneration.
There is a growing abuse whereby directors and chief executives give themselves large contracts of three, four or five years at the outset of their tenure of office, or when they are threatened by a takeover bid, so that if the worst comes to the worst and they are ousted, by whatever means it might be, they know that they will be protected. That produces acid comments on the shop floor among junior management executives, the public and the admittedly rather docile shareholders who seem to be the norm even in our large plcs.
I pay tribute to my hon. Friend the Member for Beverley (Mr. Cran) who was one of the first of our colleagues to express anxiety about the matter. He asked the Chancellor whether he agreed that British management must continue to resist excessive wage claims and ensure also that their own snouts are not too deeply in the pay trough. The Chancellor rightly replied that he would not put the second part of my hon. Friend's question in precisely that way, but he would agree with the underlying sentiment. Similar references have also been made by my right hon. Friend the Prime Minister and others.
On 19 January 1990, The Times referred to the salary of Sir Ralph Halpern, which came under fire from shareholders at the annual meeting. It referred to the fact that, once the company's profits and turnover had begun to turn down in the current recession, an additional undisclosed payment was made to Sir Ralph Halpern as the head of the Burton group, which he did not even have to reveal to shareholders. We see the difficulties that arise when shareholders assert themselves only when it is too late and the company faces a grave crisis.
We should move to a system under which such contract arrangements are established only after a chief executive, managing director, or executive chairman, has begun his or her successful remodelling or expansion of the company, rather than from day one in any given period, usually fixed—a disturbing phenomenon of modern times—through the rather phoney mechanism whereby the so-called independent sub-committee of non-executive directors on the board fix the salary of the leading 1401 executive directors. Sometimes—surprise, surprise—I then notice from the annual report that those non-executive directors have an increase in their fees.
The public are not fools and they will not be beguiled too easily into thinking that such increases are right. They compare them with the Government's fully justified exhortations to wage earners of one kind or another—including Members of Parliament—to show restraint by not making too heavy a wage claim. There is a big difference between one highly paid individual running a company with his team of directors and managers, and large numbers of the work force. The difference between the two is self-evident, but in a society that not only takes pride in the net, proven results of economic success that we hope to develop further in the future but bears some semblance still to being one nation, with fairness, balance and self-restraint by those in a position to fix their own rewards, there is a need for the Government to take a growing interest.
That is easy to say, but it is much harder in a free enterprise society and free market country to determine how the Government should involve themselves other than by exhortation. I make no apology for saying that there is no magic answer, particularly for an Administration who believe that it is not the place of Government to intervene in private matters.
The Government deliberately promote all kinds of specific and sometimes esoteric savings mechanisms and a commercial climate that encourages personal success and incentives. Above all, they have helped the higher-paid in society by reducing income tax. Those are all spectacular achievements, and the Government are entitled to ask senior executives of large companies and of publicly quoted plcs answerable to their shareholders, both institutional and private, to show self-restraint.
Earlier, I referred to the attack made on Lord King of Watnaby, who received a 116 per cent. pay rise in 1989, with the consequence that he was confronted by angry shareholders at the British Airways annual general meeting in the Barbican. It was asked whether the turnround by British Airways justified a doubling of Lord King's salary. An article in The Sunday Times of 23 July 1989 asked:
what sort of example does it set for the British workforce as it is being asked to accept wage increases in single figures? BA justifies the increases on the grounds that King's salary only puts him on par with his opposite numbers in American airlines".Again, there is the conundrum of international salary comparisons, which in reality is somewhat exaggerated.The example of self-restraint set by my right hon. Friend the Prime Minister is regarded by many people as being unfair on herself. She is perceived as very underpaid. She has a very modest salary by comparison with the huge incomes earned today that I could quote were sufficient time available.
What else can the Government do apart from set good examples of that kind? It is important for them to take an active role in pronouncing on such matters, even if they take no direct action in terms of imposing pay restraint, be it institutional or legislative. That would be totally alien to our philosophy as a Government, and I am not suggesting it as a solution.
1402 However, Government utterances can be an important influence. When there are examples of huge increases of £1 million-plus for some directors of leading plcs capitalised at more than several hundred million pounds, or for directors who have run their companies into the ground but continue to receive huge payments while everyone else is suffering or being made redundant, the Government have a role to play in making their views known.
I hope that my hon. Friend the Minister will consider the importance of monitoring statements, and so on, from his Department from time to time. If the Department merely exhorts wage earners to show restraint when making claims for higher pay, be it in the public or private sector, and does not pay attention to practices that create envy and jealousy among the lower-paid in society, it can unwittingly and innocently serve as an agent in the creation of an unfair society.
The lower income tax introduced by the Government means that the need for wage restraint among executives of leading public and quoted companies is even stronger. I pay tribute to the notable restraint shown by a number of chief executives, such as Lord Weinstock of GEC. Above all, it is important that the Government, the City, and others encourage shareholders not to remain docile but to be difficult and demanding.
I particularly call upon institutions in the City to show that they intend to play an active role in those matters, not only the matter of excessive pay levels manifested here and there and in quite a few other companies, but in these unwelcome contract developments which seem frequently to be a development of our commercial and industrial society.
I deliberately conclude my remarks—and once again I thank my hon. Friend for coming to answer the debate—by paying tribute to the number of exceptions which, if time had allowed, I would have mentioned in detail. I shall not do so today, for obvious reasons.
A total contrast is shown in Japan, which is the most successful economic system in the world, where 110 million people are creating a giant, highly successful, high-technology exporting economy and commercial system. It is interesting for us to consider the remuneration figures of the chief executives of Japanese companies which are successful worldwide. With a number of small exceptions, and not allowing for the separate question of perks and emoluments of a non-financial type, almost exclusively the picture is one of considerable restraint. The ratios are between six and 10 times the wages and salaries paid to management trainees on entry into those huge Japanese enterprises which export worldwide—and if we think of all those famous Japanese names, in almost all cases that is true—unlike the ratios of between 20 and 50 times that we find in this country, where chief executives pay themselves £1 million in comparison with a manager who may earn £40,000 for a senior executive post.
Although we accept the natural effect of inequalities in our society, and although we believe that it is part and parcel of what we hope will be a continuing economic success, we have to consider the other side of the coin, which is the Government's obligation to create a healthy economy and a moral economy. I hope I say that without showing any naivety or indulging in excessive wishful thinking. I think that the two can go together. We can create a fair society where the person on the shop floor 1403 feels part of the team and identifies with the chief executive and does not regard him as an overpaid prince of industrial and commercial society.
§ The Parliamentary Under-Secretary of State for Employment (Mr. Patrick Nicholls)I acquit my hon. Friend the Member for Harrow, East (Mr. Dykes) of having caused me any inconvenience by requiring me to be in the House today. I accept that the subject which he has chosen for debate is perhaps not debated often enough, and, even though the House is not entirely packed on this occasion, my hon. Friend knows that Adjournment debates often receive wider attention when they are printed in Hansard.
Before I turn to specifics, I should like to make some general observations. Few subjects in industrial relations generally generate more heat—and less light—than senior executives' pay. It is, unfortunately, all too easy for some commentators to act as though the factors which determine the pay of senior professional and executive staff are in some way different from those which determine the pay of all other workers. That is just not the case.
The plain—and no doubt to some unpalatable—truth is that the pay of all workers is determined ultimately by the interaction of supply and demand. My right hon. Friend the Secretary of State has said on a number of occasions that the determination of pay levels and remuneration packages has to be a matter for the companies concerned and their employees. When arriving at those determinations—usually, although by no means always through the mechanism of collective bargaining—firms should ob-viously take into account four cardinal principles: affordability, or their ability to pay; the need to recruit staff; the need to retain staff; and the need to motivate staff.
For firms in the private sector, particularly those providing internationally traded goods and services, it does not make any sense to give—or to allow themselves to be forced to concede—wage and salary increases which, after taking associated productivity gains and investment needs into account, make them uncompetitive in the marketplace. To do so will spell, sooner or later. the decline and ultimately the demise of the firm. And of course that means the loss of jobs.
The second cardinal principle is the need to recruit staff, and it is the individual firm which is best placed to assess the conditions in the labour markets in which it operates. Only it, therefore, can know what type of staff it needs, in what numbers, and with what qualifications. Only it can assess what salaries it needs to provide to attract them.
Simply to recruit staff is not enough; they have to be retained, or the firm will face continual disruption as its staff turns over, as continuity and experience are lost and as the considerable costs of training and recruitment have to be incurred over and over again, with little return in terms of high quality and reliable production and service to customers. Remuneration packages—pay, hours and other conditions and benefits—are a major means of retaining staff. That is the third cardinal principle.
The fourth is the motivation of staff. In one sense, it is perhaps the most important of all. Staff who lack motivation and commitment cannot provide the basis for a successful and competitive enterprise which is capable of surmounting the challenges of the marketplace.
1404 Remuneration levels and conditions of service, such as holiday entitlement and hours of work, can be a powerful motivating force, if used imaginatively. Those principles apply just as much to the managing director as to the process operator, the chief executive and the delivery driver.
To try to build a ring fence around the upper management and to claim thereby that they are either more or less important than any other worker simply ignores the fact that a company's success is built on everyone in it, from the top down and the bottom up. Everyone has to be recruited, retained, motivated and rewarded.
So what are the Government's views on this crucial interaction between the individual and the firm for which he or she works? As my hon. Friend anticipates and, I think, agrees, the Government believe that pay has to be a matter for those who negotiate and determine it. We saw only too starkly between 1975 and 1979 what happens when Governments attempt rigidly to control incomes. Job-destroying economic distortions are introduced; spurious productivity deals are cobbled together; and industrial relations are harmed. Above all, the policy fails to deliver the goods: the long-term rate of growth in incomes is not moderated. None of us, therefore, would wish to return to those bad old days.
Companies, however, need the best management available. In sectors where managers are internationally mobile, their remuneration needs to be competitive, at least to some extent, internationally. It is not for the Government to decide what is or is not an appropriate remuneration for key managerial jobs. The Government have never tried to defend, nor will they now, wage or salary increases that are unjustifiable, either for management or for the work force as a whole.
The justification for pay increases for chief executives and managing directors are affordability and the need to recruit and retain appropriate talent. It is a matter entirely between companies and their shareholders how that is done. No Government can judge what damage would be done to a company's prospects by the loss of key staff who were the architects of its corporate strategy.
To turn to more specific issues, I must first remark that, typically, directors' and management salaries show extremely wide variations, depending on the size of the business, its profitability and turnover. According to a recently published survey, United Kingdom managing directors' salaries range from about £30,000 a year upwards. The average chief executive's pay in the United Kingdom is £62,820 which, according to a recent survey, is considerably lower than the average in West Germany, France and Switzerland.
It is fruitless and distorting to quote but not qualify the widely known salaries of a very few key individuals as proof that, across the board, our managing directors are overpaying themselves. We rank seventh in a recently published international league table of chief executives' remuneration, when all benefits are taken into account. On these figures we should not criticise ourselves for paying, as a general rule, overly high salaries. It may be that we are actually underpaying some key players in the fight for greater business efficiency, enterprise and trading success.
It might be worth saying a word or two about non-pay benefits. They, too, are part of the remuneration package. Contrary to popular belief, the company car, medical insurance, help with the house buying, share purchase or 1405 option schemes and performance bonuses are no longer the sole preserve of the company chairman and the board member. These benefits are spreading extensively to more junior employees, to smaller companies and to many more sectors of industry and commerce, including parts of the public sector. The wider spread of those elements is attributable to their effectiveness in recruiting key staff at all levels.
We must also take into account the fact that calculating meaningful average annual increases for this particular group is difficult. Recently, three respected management consultancies came up with quite different answers to the question: by how much have directors' and managment salaries increased over the last year? One answer was 9.7 per cent., one was 11.4 per cent. and one was a massive 27.8 per cent.
I suspect that consistent, clear and accurate figures will be well-nigh impossible to obtain because of the extremely high variability within the group, and the fact that a tiny minority of very high increases will seriously distort the average figures. Be that as it may, and accepting that any figures likely to be bandied about should be treated with the greatest scepticism, we must also take into account the fact that, while some directors are highly rewarded, many of them also suffer cuts in remuneration when their businesses run into difficulty. In 1988–89, for instance, directors' total pay fell in four major companies by 18.1 per cent. 32.9 per cent. 11.1 per cent. and 21.1 per cent.
Many directors and chief executives are much more directly exposed than their work forces to fluctuations in the performance of their companies. Therefore, I agree with the remarks that my right hon. Friends the Prime Minister and the Chancellor of the Exchequer have made in the House on a number of occasions. My hon. Friend the Member for Harrow, East usefully drew attention to that.
Because time is short, I shall not quote any of those remarks at length, but when my right hon. Friend the Chancellor was Chief Secretary to the Treasury, he said:
I have never justified wage or salary increases that are unjustifiable, and I do not do so now. It is not, however, for me to determine what is or is not justifiable in that respect." —[Official Report, 8 June 1989; Vol. 154, c. 352.]It must be accepted that the right salaries are not automatically synonymous with accepting unrealistically low salaries to satisfy the complaints from some hon. Members—not my hon. Friend—who believe that anyone earning more than they do has something to answer for.
Setting a good example must involve demonstrating real leadership; high levels of commitment to the company, at times with considerable cost to family life; high levels of expertise and experience; an enterprising and vigorous approach to expansion; a willingness to embrace change; and the continuous striving for more efficient business practices. All those valuable characteristics deserve appropriate reward, but it must be up to the businesses themselves to judge what they can afford to pay their key executives.
Paying an executive less than what is needed to recruit, retain and motivate, merely to counter some of the 1406 objections that might be made by others, simply will not set a good example. In the final analysis it might set a thoroughly bad one. It is as distorting to the internal economy of a business to pay chief executives too little as to pay them too much. It might be distorting to the point of disaster if the Government were to interfere directly with those crucial decisions. By paying too little, important skills and talents will be lost. Just as much for the work force, the need to recruit and retain good management is absolutely essential for business success.
My hon. Friend and I probably agree far more than we disagree. However, I should like to mention two points. My hon. Friend mentioned the possibility of my Department conducting monitoring statements and said that it was easier to identify irresponsibility than to know how to deal with it. I have tried to give examples of some of the sources that are available to us. There is obviously a fair degree of variation, even on what commentators say. The only point that would trouble me about any formalised monitoring is that it would be difficult to know whether one was getting a comprehensive picture.
It is even more fundamental that, if one found that there had been a steady or perhaps dramatic increase in particular directors' salaries, knowing that in a formalised way would not enable my Department or any of my hon. Friends to say that those increases must have been unjustified merely because they were at such a level. It would not be possible to go so far.
I accept that that would be a more difficult argument for my hon. Friend and me than for the Opposition, who would take a more traditional and formalised attitude. It is difficult for us to debate the matters in the context of a society which my hon. Friend said should be economically and morally healty.
The problem with trying to lead by example is that those whom we expect to be impressed by our example are not impressed at all. I am sure that my hon. Friend, like me, will sometimes have been attacked at public meetings on the subject of the salaries of Members of Parliament. When I compare them with those of, for instance, civil servants or the senior chef in the Members' Dining Room, and point out that we have exercised considerable restraint over the years, my words are usually greeted with hoots of derision, the implication being that a Member of Parliament who is paid £24,000 a year is grossly overpaid. People's attitude is that, if they only had the time, they could do our job more effectively. I do not know whether that solves the conundrum, but at least it means that I can finish on a note that unites my hon. Friend and me.
I value the opportunity to consider the subject that my hon. Friend has raised and—I hope—to respond to some of his concerns.
§ Mr. SpeakerBefore I adjourn the House, may I wish hon. Members and our officials and staff a very happy Easter recess?
§ It being half-past Three O'clock, MR. SPEAKER adjourned the House without Question put, pursuant to the Order [27 March] and the Resolution [16 March] till Wednesday 18 April.