Directors' Remuneration (Hansard, 16 July 2002)

§ Lord Lea of Crondall
asked Her Majesty's Government:
Whether they accept the conclusion of the International Corporate Governance Network that pressure from the international market-place is not a justification for rapidly rising boardroom salaries.

§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)
My Lords, it is for shareholders and remuneration committees to decide whether international market comparisons should be taken into account in setting the level of their directors' pay. The main concern for the Government is that there should be an effective 1093 linkage between pay and performance. The Directors' Remuneration Report Regulations, which we recently laid before Parliament, will improve the transparency, accountability and disclosure of linkage to performance.

§ Lord Lea of Crondall
My Lords, I welcome the steps to which my noble friend referred. Does he agree, however, with the finding of the International Corporate Governance Network that the attempts to justify boardroom pay increases averaging 10 per cent year on year—three times the average for the rest of the workforce—on the grounds of international market performance are spurious and unsustainable? Does the Minister agree with John Monks that the scrutiny of the work of remuneration committees by annual general meetings of shareholders—fewer than half of whom bother to vote—would be more credible if there were worker representation on the committees, as in the successful economies of Scandinavia?

§ Lord Sainsbury of Turville
My Lords, the report to which my noble friend refers—the International Corporate Governance Network report, Executive remuneration—the caucus race,was probably right to say that there was no clear justification for the continuous leap-frogging of settlements taking place in many cases. The information that the network provided on international comparisons was rather scant. The report said that more than 10 per cent of FTSE 100 companies now have a chief executive or chairman from another country. There is, therefore, some merit in the argument about international comparisons but not as much as to justify the use that has been made of it.
My noble friend referred to the representation of workers on remuneration committees. Under UK corporate governance structures, it is for shareholders and non-executive directors to make the decisions about remuneration. It is important to realise that best practice guidance states clearly that remuneration committees should be sensitive to the wider scene, including pay and employment conditions elsewhere in the group.

§ Lord Razzall
My Lords, the Minister referred to the reference in the report to the fact that 10 per cent of chief executives of FTSE 100 companies are of international origin. Does he accept that a significant number of chief executives of FTSE 100 companies bear no international comparison with regard to their remuneration?
The Minister probably answers this question at least once a month—certainly once every two months—from where he sits. Does he accept that Her Majesty's Government must make up their mind? Do they think that this is something to do with them, and, if so, what will they do about it? Or, do they think that it has nothing to do with them, in which case why does not the Minister say so?

§ Lord Sainsbury of Turville
My Lords, I agree with the noble Lord that many directors have no 1094 opportunity to go abroad to get another job and should not be compared to people on the international market.
The Government's line has been clear and consistent on the many occasions on which I have answered the question: it is for shareholders and remuneration committees to make the decisions. It is the Government's role to make certain that there is a proper framework, including transparency and accountability. That is why we are bringing in the regulations, which will mean that shareholders will have a chance to vote on the remuneration report produced by the directors. That is the right division of responsibility between the Government and the shareholders.

§ Lord Renton of Mount Harry
My Lords, on this occasion, I agree with what the Minister says. It must be up to shareholders to make the decision. The real resentment lies not in the initial salary of the board or the chief executive but in the fact that, when a company goes pear-shaped, it often seems that the chief executive walks away with a huge amount of compensation. Is not that the area on which the major shareholders—life companies, pension funds and so on—should concentrate? They should make certain that, at the point at which a company fails under particular boardroom leadership, salaries should be reduced and bonuses and stock options removed.

§ Lord Sainsbury of Turville
My Lords, as the noble Lord paid me the compliment of agreeing with me, I shall return the compliment and agree entirely with what he said. If a company fails, it is for shareholders to make certain that there is a proper linkage between pay and performance.

§ Lord Dormand of Easington
My Lords, my noble friend Lord Lea of Crondall is to be congratulated on bringing the matter to your Lordships' attention. As has been said, it depends on what the Government will do about it. My noble friend the Minister spoke about relating the payments to performance, but does he agree that the sort of huge increases that we see almost every week are paid when the companies are, in fact, losing money? That cannot be justified in any circumstances.
Does my noble friend agree that the Greenbury report of 1995 promised many things but has been a failure? Will he tell us—however briefly—the essential difference between that report and the report on the statutory instrument that is now before the House?

§ Lord Sainsbury of Turville
My Lords, we come again to the question of the linkage of pay and performance. The reason why the Government are bringing in the regulations is that the Greenbury report effectively recommended that boards should take new measures. Those measures have not, in fact, been taken, and it is clear to the Government that, unless there is legislation, best practice will not be followed. That is why we are introducing the regulations.