§ 3.36 p.m.
§ Lord Fraser of CarmyllieMy Lords, with the leave of the House I shall repeat a Statement made in another place by the President of the Board of Trade. The Statement is as follows:
"Madam Speaker, I would like to make a Statement about the report of the Study Group on Directors' Remuneration, chaired by Sir Richard Greenbury, which was published today.
"The group was set up in January this year on the initiative of the CBI, in the wake of public concern about executive remuneration in some public limited companies. The Government supported the setting up of the group and we now welcome the publication of its report. We congratulate the group on a thorough, speedy and authoritative review of the issues. We welcome its recommendations in principle and strongly support the emphasis which the group places on the need for pay to be justified by performance.
"The group's report follows shortly after the report by the Select Committee on Employment on the Remuneration of Directors and Chief Executives of Privatised Utilities. While the Government will give a considered response to both reports when Parliament resumes after the Recess, the House will expect me to make some preliminary comments now and I willingly do so.
19 "Pay in the private sector is a matter for companies and their shareholders. The Greenbury initiative demonstrates that companies and institutional investors recognise the level of concern on this issue and are determined to act. There is no doubting the authority of the group's recommendations. The group's report vindicates the self-regulatory approach. It will deliver more effective, speedier results than legislation could achieve. Indeed, there has already been a perceptible change in some companies' attitudes to these matters.
"The Greenbury Report will be underpinned by action by the Stock Exchange. Its recommendations are addressed primarily to listed companies. It is appropriate therefore that the Stock Exchange should enforce them through the Listing Rules. The Government welcome the Stock Exchange's announcement this morning that it will do so.
"The Government have no intention of introducing a top people's pay policy. We do not begrudge top salaries for top performance. Our companies must compete at world level if our nation is to prosper. We must pay the rate for the job. Greenbury points out that although comparisons are difficult, total remuneration levels in the United Kingdom are well below American levels and broadly comparable with other European countries. The fastest way to drive our best talent abroad—in any field, not just business—would be to impose restrictions on earnings.
"There has been particular concern about windfall gains arising from share option schemes in the privatised utilities. The Government accept the group's recommendation that for newly privatised companies no share options should be made until at least six months, and preferably a year or more, after privatisation. The great success of virtually all the privatisations of recent years has been a feature of the strengthening of Britain's economy. Consequently, some share options have yielded substantial benefits to those who guided that success. But the huge achievements of the privatisation programme have brought dramatic benefits for consumers in terms of lower prices, more choice, better consumer-focused service and more investment, as well as a large and growing flow of revenue to the Exchequer through taxation.
"There are three recommendations for legislative action addressed to the Government. My right honourable friend the Chancellor of the Exchequer has already announced this morning that the Government will introduce legislation in the next Finance Bill to withdraw the income tax reliefs at present available to directors and employees participating in executive share option schemes which have been approved by the Inland Revenue. The withdrawal of the reliefs will take effect in relation to grants or the exercising of options on or after today.
"The second and third recommendations are for minor amendments to the Companies Act to remove overlap with the group's proposals for comprehensive disclosure, and to amend the Companies Act rules on the disclosure of the value of pensions benefits, when 20 they have been drawn up by the actuarial professional bodies. The Government will consider both recommendations carefully and quickly. We remain willing to consider other legislative back-up if experience shows it is needed.
"In summary, the Government welcome the publication of the Greenbury group's report. It is comprehensive and well judged. It will help ensure that pay is based on performance. It tackles specific problem areas with firm, fair and practical proposals. It is a package which meets today's needs and I believe it should be supported."
§ My Lords, that concludes the Statement.
§ 3.40 p.m.
§ Lord PestonMy Lords, I thank the noble and learned Lord the Minister for repeating this rather short Statement made by his right honourable friend the President of the Board of Trade in another place. The Greenbury Report is a CBI report. I start off with one or two rather obvious questions. Is the report available to your Lordships in the Printed Paper Office, or do we have to write to the CBI and buy it? The Statement says that there is no doubting the authority of the group's recommendations. I am sorry to hear that. I doubt the authority of the group's recommendations, a matter to which I shall return. But since this is said to be authoritative, does the noble and learned Lord know whether the committee took evidence on a large scale, and is it publishing a volume of evidence to support what it has said? If that is the case, can we see it?
The Government implicitly state that these remarks are the Government's first response to the Greenbury committee. They say that a considered response will be made to the report when Parliament resumes after the Recess. Can your Lordships be assured that that considered response will include a considered response made to your Lordships, so that we can look at this matter in considerable detail and not merely be the afterthought to the other place?
It is as well to recall why this committee was set up and what it was all about. It was set up because of extreme public distaste, expressed by many people across the whole of our society—but not least by the Prime Minister and certainly not least by my right honourable friend the Leader of the Opposition—over an apparent desire on the part of certain senior executives to reward themselves to a degree, to put it as mildly as I can, that appeared to be rather unseemly. Others have made stronger statements but I shall say no more than that.
More recently, all kinds of commentators have remarked that workers—ordinary men and women—are asked to settle for pay increases little different from the rate of inflation—-in other words, very little in the way of real increases in pay—yet management, or some management, have not felt any obligation on their part to modify their demands to much the same set of numbers. Indeed, it is not merely that they have asked, "Please sir, can I have some more?"; but they have asked, "Please sir, can I have an extraordinary amount more?" In doing that they have given the lie to one of the main propositions on which the Government have based their 21 policies for a great many years. They argued that if they lowered the marginal rate of income tax—that was a central plank of the Government's policy from 1979 until recently—there would be no need for senior management or executives to demand massive pay increases because at those low marginal rates quite low pay increases would still yield very considerable net gains to them. It is apparent that, having lowered the marginal rate of income tax while raising other rates of tax for other people, that has not acted in any way to moderate pay demands.
The question that caused all this was: why should there be massive differences in the rates of increase of pay within firms in particular? That has become confused with a different question of pay differentials altogether—the question of why top management should be paid more than the least skilled worker. That is a classical question and the answer is to do with rewards for ability, for investment in education and training and for scarcity. The point that Greenbury was supposed to address—on what little I know, which is only what the Statement says, it does not seem to have addressed it at all—is not the question of why the differentials should exist but why the rates of increase of pay for senior executives should be of several orders of magnitude more than for ordinary workers. In other words, if differentials are set as they are—and we can argue about that—once that has been correctly sorted out, rates of pay, it seems to me and I think to almost all serious commentators, except in very special cases, should increase at about the same rate for everyone in the organization—top management, middle management, skilled workers and unskilled workers, bearing in mind that the firm itself is an integrated unit.
To take a specific case, I have no doubt that Marks and Spencer benefits enormously from having Sir Richard Greenbury. But I have to say that I think it also benefits from the person on the till who actually serves your Lordships and serves me. They are all part of the same organisation. I can see why Sir Richard Greenbury should earn more than the person on the till but I do not remotely see why his rate of pay should increase more than that of the person on the till as the general case. That is the matter that the report was meant to be about. In my judgment it does not seem to have been addressed.
In connection with these rates and increases in top people's pay, to argue that somehow they reflect their market value flies in the face of all reason. Are we to believe that in the privatised utilities these people's world productivity suddenly sky rocketed to the degree that it did? Is that what Sir Richard is asking us to believe? Is that what the Government are asking us to believe? I do not believe it. To take the best and most productive market in the world, the United States, I have looked and asked for evidence that any of these people has been remotely even thought of in head-hunting terms in that market. Incidentally, the Statement says—I was rather taken aback by this—that,
total remuneration levels in the United Kingdom are well below American levels".22 Jolly right they are! American GDP per capita and American productivity are far in excess of ours. It would be extraordinary if their remuneration levels were not higher than ours. What light is meant to be thrown on anything by that statement is completely beyond me.There is a technical question to do with the privatised utilities. That was the origin of all this. It was pay in the formerly nationalised industries that caused all the fuss. The regulator exists in these industries because they retain monopoly power. The regulator is there to regulate the use of that monopoly power and to limit it as far as possible. What I do not understand—I have argued this and my noble friends have argued this for some years in your Lordships' House—is why the Government have set their face against the worst abuse of monopoly power that one knows about; namely, the use of monopoly power on the part of the management of those former nationalised industries to reward themselves. When we put down amendments to say, "Let the regulator have that as an area that he or she can look into", the Government steadfastly say no. That does not make sense to me.
The report favours self-regulation, but the report is an example of self-regulation. If one ever wanted to put up a case against self-regulation this report would be it. Can anyone really believe that the committee, which contained not a single independent element, would look harshly on its own rewards or the rewards of its friends? I must admit that until this matter came up I had no idea of the extraordinary interlinkages between those people. They all sit on each other's remuneration committees; they all know each other; many of them sit on the boards of several of the relevant firms. The idea that that somehow leads to an independent or rational outcome defies belief.
The other point that intrigues me is the obsession on the part of top management with relativities. It intrigues me because it reminds me of the worst days of trade union behaviour. It is exactly that with which the trade unions were always obsessed. There is a certain sense of schadenfreude, if I may use that word, to see the top management at least as obsessed as the trade unions were with "He is getting more than I am getting. Why?".
§ Lord Graham of EdmontonMy Lords, in the bad old days.
§ Lord PestonMy Lords, yes, in what were called the "bad old days". wish to make two or three further points. I understand that the group recommends the limitation of contracts for senior management to one year. That is a good point in the sense that, if management is rotten and does not perform, the cost of getting rid of it with a one-year contract is a good deal less than if it is a three or four-year contract. That is a good idea.
The question then arises of the special tax treatment of share options. I have two questions on that. My immediate response was that treating share options as income rather than as capital gains would make little difference to most people. We are talking of huge sums of money and most of those people will already have exhausted their allowances and would therefore be taxed in much the same way.
23 What puzzles me is that, whereas this morning's press, in discussing the leakages of this document, said that the Chancellor, in making the tax changes that he forecast for the Finance Bill, said that the yield would be £80 million, there is nothing in the Statement in that regard. It is a pity because it would throw some light on how much benefit has already been received by these people. Perhaps the Minister can say whether there is some reason why we have not been told how much the withdrawal of the income tax relief will yield to the Exchequer. If it is because the Treasury cannot do the sums quickly, perhaps we can be told when we will be given the answer to that question.
My last point concerns self-regulation. If there is to be self-regulation, it must be shareholder-led. The troublesome point about the Statement, although it may be dealt with in the report, concerns the fact that the people who are really responsible are the institutional investors. There are technical problems in relation to them becoming involved in detail because of insider trading and what they may learn. But do the Government have any proposals, by way of changing companies legislation, to encourage the investment institutions to take all these matters more seriously and to speak up on behalf of the small investor? After all, most of the investment institutions are investing on behalf of small savers, even though they themselves are very big. It would not be a bad thing if they took the whole matter more seriously.
§ Baroness SeearMy Lords, I too thank the noble and learned Lord for repeating the Statement. I shall confine myself to commenting on the Statement because I have not had the opportunity of reading the Greenbury Report and am not prepared to rely on leaks of reports—a practice which I believe to be deplorable.
We welcome certain aspects of the report. We welcome the fact that taxation changes will be made on the share options. That is a recommendation which my party made to the Greenbury group. We need to look at the whole question of pay for directors of privatised industries in a different way from the rest of genuinely competitive industry, particularly competitive industry on an international scale.
The privatised industries still contain many of the most unacceptable features of a monopoly, as many of us said that they would when privatisation took place. It has been and remains difficult to obtain any kind of real assessment of their performance. So many of the suggestions in the report rely on a confidence that one can measure performance. But how does one do that, especially if one is using the market as a major instrument for measuring success or failure, in a privatised monopoly? Those industries need to be approached differently from other industries.
Performance is hard to judge. If one is a monopoly and is free to put up prices, although limited to some extent by the regulator, but one can control most of the factors which lead to the final outcome, it is difficult to say that because profits have gone up that has been due to any one person's efficiency, be it at director or any other level. It has been possible to control what are 24 essential elements in obtaining a real measure of performance. That means that a quite different approach to regulation should be taken when considering the privatised industries as opposed to other industries.
I agree that institutional investors are extremely important in that regard. We discussed that in another connection at considerable length earlier this year and the role that they should play having regard to the great amount of money that they use and their potential power. That is something which needs to be examined. We should look at who should have decision-making power of that kind in the privatised sector. I suggest that it is something a regulator should be able to take into account and, unless there is a substantial decrease in prices, a sharp question should be asked about any increases in the remuneration of directors.
When we turn to the non-privatised sector of industry—the market sector—and particularly organisations operating internationally, the position is much more complicated. My mind goes back to the days—a long time ago now—when I was a member of what was called the Top Salaries Review Body. One of our difficulties was that we were dealing with people employed in senior positions on the boards of nationalised industries, some of whom were genuinely in an international market, but others had no place whatever in an international market. That is one reason why so-called comparability proved to be a less effective instrument in trying to decide what people ought to be paid.
The question of how rewards in the non-privatised sector should be determined is something into which I hope the Greenbury Report has gone more fully than is suggested in the Statement. Again, shareholder power is obviously very important and so is openness of all the rewards that people receive. A great deal of attention has been given to the actual amount of money paid in salary, directors' fees or whatever they are called. But in many cases a great deal of total remuneration is made up of other aspects, which are of considerable importance.
I note that the Statement refers to pension benefits. That is of enormous importance. In some cases the value of the increase in pensions is far more significant and expensive than the actual increase in the annual remuneration. But there are other issues to be considered. The determination of British management to have their motoring on the cheap has been one of the most ridiculous developments. It was introduced because under previous governments taxes had reached an absurd level and people were being remunerated in other ways, otherwise they could not be remunerated at all. But it still remains.
There are other benefits which should certainly be included when one is looking at the remuneration of top managers and directors; namely, pensions, motorcars, school fees and sickness benefit. All those can add up to a much more significant amount than that paid out in salaries. The Greenbury Report may deal with that; if not, some other body ought to.
§ Lord Fraser of CarmyllieMy Lords, I begin with the technical questions asked by the noble Lord, Lord Peston. He will appreciate that this is a private sector 25 report rather than one commissioned and paid for by the Government. It is available at £10. However, my understanding is that a number of copies are being made available in the other place. If that is confirmed, I shall ensure that a comparable number is made available to your Lordships.
My understanding of the situation is that the group certainly took evidence from a large number of interested parties. I do not know whether it intends to publish all the evidence which it received. That is clearly a matter for the group rather than for the Government. The institutional investors were represented on the group, which produced a unanimous report. My understanding is that their representatives have welcomed the report and will be encouraging their member companies to comply with it. Indeed, I would not have thought that a weatherman was necessary in order to see which way the wind is blowing at the moment. Investors are already playing a more active part than they did at the time Greenbury was established.
I was asked whether there might be an opportunity for a considered response on some aspects of the matters considered by the Select Committee in another place. Noble Lords will appreciate that I cannot give an immediate answer now, but I have no doubt that it is something which will be of interest to your Lordships. Those with responsibility for that will doubtless have regard to what has been said.
The noble Lord, Lord Peston, was right. I suppose that the clear focus of the concerns which Greenbury was established to address relates to the privatised utilities. Perhaps I may make it absolutely clear that we look to all companies, including privatised utilities, to pay careful attention to the recommendations in the report. One of its recommendations is that the board of any company whose remuneration policies have attracted controversy may wish to seek explicit backing for them from shareholders by tabling a resolution at the annual general meeting. That is a strong recommendation at paragraph 5.31, and one which I know the President of the Board of Trade is encouraging companies to implement.
I am not sure that I entirely agree with the noble Lord, Lord Peston, that payments made to executives are out of balance or kilter with the rest of the world. Executives are not overpaid by international standards. As I have said, the total remuneration levels are well below those of the United States. A survey shows that a chief executive of an industrial company with annual sales of about 250 million dollars, would earn £512,000 in the United States compared with £249,000 in the United Kingdom. I agree that it is difficult to make comparisons, but that would seem to indicate that those companies are not marching in step.
What concerned me more was that the noble Lord seemed to be suggesting that somehow, and through a back door, we should be establishing some sort of pay policy, even a maximum pay policy. If that was his intention, I do not believe that he will be surprised to hear that I would strongly disagree with any such approach. If there have been substantial increases in pay 26 for directors of former nationalised utilities, that may in part be due to their pay catching up with that in private sector companies.
The noble Lord suggested that we might address this matter by giving the regulator within the utility area the power to adjust salaries or prices by requiring them to be reduced. The noble Baroness, Lady Seear, also addressed that point. To give an example, perhaps I may deal with the matter in relation to British Gas. If the totality of the remuneration of the British Gas board were to be removed, that would mean a saving of something like 1p a week for all gas consumers. Against that, this self-same board has achieved a saving of about £77 per average consumer each year. It would be an extraordinary proposition that, if one assumed the oddity of taking out altogether any remuneration, that is a real way in which prices could be adjusted. If there were to be a direct intervention as regards salaries, the regulator could not be expected to judge on the merits of individual board members and set their remuneration. The regulator should serve the interests of the consumer, concentrating on lower prices and better services.
As regards one-year contracts, I agree with the noble Lord that that is an extremely important part of what is proposed. My understanding is that the Stock Exchange will require listed companies to comply with certain specific recommendations. One of those is the disclosure of any service contracts which provide for or imply notice periods in excess of one year. That seems correctly to emphasise what is happening with the proposed changes. A set of core requirements will be imposed on companies. But if they do not follow through other recommendations, they will be under an obligation to disclose and to give their reasons for not so doing. That seems to be an appropriate way to go forward.
Finally, as regards taxes, value would be lost. I understand that the latest figure for 1995–96, with the removal of this relief, which is what it amounts to, is something like £80 million. That is an arrangement which, if the noble Lord has not sought it, I certainly understood Mr. Gordon Brown was urging. The one respect in which he got the matter wrong was to believe that something like £200 million was the value of that relief. He was clearly wrong there.
I hope that I have answered most of the points in this detailed matter as fully as I can. I can announce that 100 copies of the report have been placed in the Vote Office.
§ 4.7 p.m.
§ Lord Boyd-CarpenterMy Lords, can my noble and learned friend say whether the House will have an opportunity fully to debate this matter very soon after we return in the autumn? Can he give a firm assurance to that effect? The report raises a number of extremely important matters on which I believe the House will wish to express a view. Is my noble and learned friend in a position to say what additional revenue will accrue to the Exchequer as a result of the tax changes?
§ Lord Fraser of CarmyllieMy Lords, it is not for me to give absolute guarantees what the business of the House might be after it returns in the autumn. I repeated 27 a Statement by my right honourable friend the President of the Board of Trade. He said that his observations on this matter were in the nature of some preliminary comments. I do not believe that there is any understanding on anyone's part that this is the end of the matter. Clearly, there will be a considered debate, not only in your Lordships' House, but, I hope, throughout the City and industry, as this matter is more clearly understood over the coming months.
I believe I gave an answer to the second part of my noble friend's question when I indicated to the noble Lord, Lord Peston, that my understanding of the matter is that for the year 1995–96 the withdrawal of tax relief, which allows those who are within an approved scheme not to pay income tax, although they have to pay a greater amount of capital gains, will amount to something like £80 million.
§ Lord Dean of BeswickMy Lords, in the Minister's detailed reply, he referred to the former public utilities. Is it not the case that some of the City institutions charged with dealing with the valuation of these former public utilities when they were privatised, got it wrong by as much as 30 per cent.? That left a very full trough of money for people to put their snouts in. The Minister will understand if people on this side of the House are not very enthusiastic about self-regulation once again being the order of the day at the top end of the financial scale, bearing in mind the recent failures by the City of London and Lloyd's of London.
The Minister also referred to the fact that neither the Greenbury Group nor the Government are involved in levelling rates of pay. The Minister should be aware that, in fact, members of the Greenbury Group level rates of pay of as low as £3 an hour on their employees, which I think is an absolute disgrace when we talk about people being "adequately rewarded". Although I do not single out any particular member of the Greenbury Group, some are involved in that.
The announcements that have been made today by Mr. Clarke, the Chancellor, are extremely welcome, but they will operate only from today. However, in the intervening period—that is, from the date of privatisation of those utilities to today—huge sums of money have been taken from the trough and raided by those people. Is the Minister saying that there is no way in which the Government can claw back any of that? The Minister should understand that people no longer accept that the Government cannot legislate retrospectively because it is "not done" when over the past few years, the Government have used retrospective legislation whenever it has suited them.
I support what was said by the noble Lord, Lord Boyd-Carpenter. I am sorry that we are to rise for the Recess this week. It may well be a convenient time to do so—and it happens like this under governments of various colours—but I should have thought that your Lordships' House should debate this subject as a matter of urgency. I am not by any means completely satisfied with what Greenbury said. I should like to read it in closer detail; but I do not think that it means much in the long run.
§ Lord Fraser of CarmyllieMy Lords, I am aware of the complaints that the Government sold the utilities at prices that were too low; but, having taken independent advice, the view was that the price was set at the maximum that the market would bear. I also recollect that when the price was set too high and a flotation was not all that successful, the noble Lord was equally vigorous in his condemnation of what was undertaken.
Given the noble Lord's anxieties, I invite him to consider what the Greenbury Group said in greater detail and its set of recommendations for listed companies. As I said in opening, the Stock Exchange accepted those recommendations and will be requiring listed companies to comply with certain specific Greenbury recommendations. Listed companies will be required, for example, to set out their remuneration policy and to disclose full details of all directors' remuneration, including share options and long-term incentive schemes. I apologise to the noble Baroness, Lady Seear, for not having answered her question on that earlier. Listed companies will also be required to invite shareholders to approve all new, long-term incentive schemes whether payable in cash or shares. They are to refrain from issuing executive share options at a discount.
Therefore, I advise the noble Lord that a set of important recommendations has now been put forward which is to be coupled with the requirement of clear disclosure if other recommendations are not to be implemented. We shall doubtless return to the matter at a later date but I hope that, having reflected on it, it will be appreciated that a real attempt has been made to address those issues that have caused public concern.
§ Lord CockfieldMy Lords, I wonder whether my noble and learned friend will clarify his point about the tax treatment of these matters. It will be within my noble and learned friend's recollection that capital gains tax used to be charged at 30 per cent., which corresponded to the figure which had been the standard rate of income tax for a considerable period of years. In those days, to charge capital gains tax instead of income tax represented a considerable benefit. But Mr. Nigel Lawson (as he then was) increased the rate of capital gains tax to 40 per cent.—
§ Lord Cockfield—thereby removing a large amount of the incentive to dress things up as capital gains instead of income. In those circumstances, it is very difficult to see how an £80 million tax yield could come from charging those things to income tax instead of capital gains tax unless there is a great deal more which has not been revealed in the highly sanitised edition of the Greenbury Report to which your Lordships have been invited to listen.
There is another and perhaps even more important point. Does the fact that the Chancellor of the Exchequer regards this as so important a move, and one which will remove the sense of public outrage which rightly or wrongly exists, mean that for the more innocent members of the community he now proposes reducing capital gains tax to 30 per cent. or, indeed, to 25 per cent., which is the present basic rate of income tax?
§ Lord Fraser of CarmyllieMy Lords, I am sure that my noble friend the then Chancellor of the Exchequer is more than able to answer for himself and to explain why he raised that rate. It was clearly right to do so to ensure that such valiant efforts would not repeatedly be made to shift income into capital or vice versa as has happened from time to time. I should point out that £80 million is the figure that has been given to me. The noble Lord will appreciate that the annual capital gains tax allowance is some £6,000. The noble Lord may be surprised that because of its presence such a significant global sum should emerge at the end of the day, but that is what I am advised.
The present Chancellor of the Exchequer will have to answer for himself on his proposals for the rate of capital gains tax. However, in addressing such issues it is important to ensure that those employees who receive free and tax-free shares from their employers of up to £8,000 per annum under approved profit-sharing schemes should clearly be excluded from the provisions. Such arrangements in favour of employees are clearly desirable and one would not want to do anything to damage them.
§ Lord BarnettMy Lords, having handled a few tax matters when the noble Lord, Lord Lawson, was in the other place and in another capacity—when we both were—perhaps I may first take up a technical point on taxation, following the noble Lord, Lord Cockfield. Everything depends not on what the Chancellor is now saying, but on what goes into a Finance Bill and on how it ends up in a Finance Act. As I am sure that the House is aware, that is not always the same as was intended.
I assume that the Minister will be able to confirm that the saving of £80 million which he mentioned is very much a guess and depends on a whole variety of factors, not least on the question of allowances. The Minister said that there would be no allowances, but allowance is made for capital losses when set against capital gains. Indeed, it is possible to create some if they do not already exist, especially for members of Lloyd's. Perhaps the Minister will confirm that that figure of £80 million is very much a guess.
I turn now to the central and more serious point, which is what the Government propose to do about the level of pay of senior directors in all companies, not just in the utilities. I take the point that the Minister is not in favour of an incomes policy. The Minister said that we do not need to worry because this is what happens in the United States and the institutional investors are happy. My noble friend Lord Peston did not mention institutional investors; but the fact is that many of the self-same institutional investors are also board members of large companies where they are paying themselves very substantial salary increases. Therefore, it is a bit much to say that there is no incomes policy when there clearly is an incomes policy which allows that to happen. Perhaps the Minister will confirm that the Government intend to allow all this to go on with very little in the way of change. Greenbury referred to one year and said that after that there would have to be re-election, but that does not mean very much, as I am 30 sure that the Minister is aware. In effect, is he not saying that it is not proposed to do anything at all about either the public utilities or other public companies?
§ Lord Fraser of CarmyllieMy Lords, I am reluctant to engage in a debate with the noble Lord and my noble friend on tax matters. What is being removed is the preferred status of an individual who is presently within an approved scheme. That will fall away. The individual will find himself in exactly the same position as someone who is now a member of an unapproved scheme. What will be lost is the benefit of the delay in making the capital gains payment, the annual allowance and the opportunity to set any CGT indexation against the whole gain. That is the figure that I have been given, and I have no reason to believe it is wrong. It is not simply a forward guess but is based on the position in the past.
One of the important recommendations of the report is that in future remuneration committees should be made up of non-executive directors, with no potential conflict of interest arising from cross-directorships. When the noble Lord manages to get to the Printed Paper Office and look at the code of best practice, he will find that that is the recommendation under A4. I do not suggest that that does not mean that those who are part of a remuneration committee will not have an idea of what may be comparable salaries around the industry. However, what has been regarded as objectionable by some people is the situation where there has been a rather intimate set of cross-directorships. It is now the clear recommendation that that rather cosy arrangement should not continue, certainly with regard to the remuneration committee.
§ Lord MayhewMy Lords, will the Minister kindly elucidate further what he has said about exemptions? If, as I understand it, the Chancellor proposes to change the taxation of gains from capital gains tax to income tax, the taxpayer will pay 40 per cent. of the £6,000 exemption on capital gains; that is to say, £2,400. Each person will pay exactly that sum. Someone who has gained £10,000—perhaps an employee—will pay 24 per cent. of his gain, whereas someone who has made £1 million will pay 0.24 per cent. of his gain. Is that the intention of the Government?
§ Lord Fraser of CarmyllieMy Lords, the present situation is that if the individual is within an approved scheme and makes a gain at the time he exercises his option, no tax is then payable. It is left aside until there is a sale, at which point both the gain made earlier and on the eventual sale is all treated as capital gain. If it is so treated and in that year the £6,000 exemption is not taken up, the individual can take advantage of that. There must be a real value in not having to pay tax immediately. A further feature of that is indexation. The effect of the changes proposed by the Chancellor of the Exchequer with effect from an exercise as of today is that those who are in approved schemes will find themselves in exactly the same position as individuals in unapproved schemes; that is to say, any gain made at the point that the option is exercised will be treated as subject to income tax rather than capital gains tax at an indeterminate point in future.
Lord MorrisMy Lords, many will welcome Her Majesty's Government's early support of what I understand to be the central tenet of the recommendations of the Greenbury Report, namely, that any increase in remuneration should be linked to performance. My question is simply: performance of what or by whom?
§ Lord Fraser of CarmyllieMy Lords, clearly there are a number of detailed features of performance that one will expect the remuneration committee to consider. What I believe is important is that there should be clearer confidence that, where the remuneration committee exercises its discretion, there should be no hint that there is a cosy relationship between the individual whose remuneration is to be considered and those who have the power to award it. I believe that if the proposals that the Greenbury group has advanced are implemented, much of the concern that has been expressed should fall away.
§ Lord EatwellMy Lords, in his early consideration of this matter Sir Richard Greenbury recommended that directors' pay should normally move broadly in step with that of other employees and should not shoot ahead by the massive percentages that we have seen in the case of the utilities. However, that proposition by Sir Richard Greenbury does not appear in the report. Are the Government in agreement with Sir Richard's initial position or not?
§ Lord Fraser of CarmyllieMy Lords, our view is that pay should be carefully determined by a remuneration committee that can regard the matter objectively, having regard to the performance of the individual and, within that context, the performance of the company. What we do not wish to see introduced is any kind of maximum pay policy which says that because other employees receive such and such a rate it necessarily follows that the chief executive and others must receive remuneration at exactly the same rate. In certain circumstances it would not be difficult to envisage a case where the chief executive, according to some of the more modern arrangements in place, received a cut in pay related to the overall performance of a company, or employees, such as those working on the tills in Marks & Spencer last year got their pay increases while Sir Richard Greenbury did not.
§ Lord BoardmanMy Lords, might not the quickest, most expedient and satisfactory way to deal with the recommendations of the report be to encourage the Stock Exchange—if it needed any encouragement—to include this in their rules of conduct, known as the yellow book? That would be completely binding on all listed companies, including those that had been recently privatised.
§ Lord Fraser of CarmyllieMy Lords, I have already indicated that it is my understanding that the Stock Exchange welcomes what has been proposed by the Greenbury group and will adopt a two-part approach to implementation by introducing these features into its listing rules: some will be core requirements and others 32 recommendations. What is critical about the recommendations is that if they are not followed through there will be a requirement for the disclosure of the reasons for not following them and an explanation.