Directors' Pay (Hansard, 11 March 2003)

§ Lord Dormand of Easington
asked Her Majesty's Government:
How effective present legislation is in restraining excessive increases in payments made to company chairmen and chief executives.

§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)
My Lords, directors' pay is largely a matter for companies and their shareholders. Last year, the Government brought in new legislation—the Directors' Remuneration Report Regulations 2002—which will improve transparency, shareholder accountability and linkage to performance for directors' pay. Those regulations apply to quoted companies with financial years ending on or after 31st December 2002. That means that shareholder votes at company annual general meetings on the new 1228 directors' remuneration reports will begin from April onwards. The Government will pay close attention to the operation and effect of the new regulations.

§ Lord Dormand of Easington
My Lords, judging from newspaper reports, present legislation and the regulations to which my noble friend referred do not appear to be very effective. Hardly a week goes by without our reading of big increases being awarded. Is my noble friend aware of the new disclosure rules on retirement benefits, including one of £10.1 million for a group chairman? Why do a Labour Government approve of such big increases for executives and approve of the difference between those and increases awarded to the general workforce?

§ Lord Sainsbury of Turville
My Lords, ultimately the payments made to directors must be the responsibility of the shareholders, whose money it is. As I said, the regulations came into effect only on 31st December 2002. Although I believe that they are probably having an effect already, we shall not see that effect until the commencement of the annual general meetings at which votes will take place on the remunerations as reported in the accounts. I believe that we should await the impact of those meetings.

§ Lord Barnett
My Lords, I declare an interest as a non-executive chairman of a small listed company. Would my noble friend care to give us a definition of the word "excessive", as used in the Question? Surely the proper Answer to the Question is that legislation could not conceivably be used to decide how best to obtain a fall in so-called "excessive" remuneration. How on earth could legislation achieve that?

§ Lord Sainsbury of Turville
My Lords, on the few occasions that one is both asked a question and given the answer, I believe it is very foolish not to accept the answer.

§ Baroness Miller of Hendon
My Lords, does the Minister agree with his noble friend Lord Barnett that excessiveness is in the eye of the beholder? Having said that and having listened carefully to the noble Lord's first Answer to the Question, can he say why, if that is what the Government really believe, they killed off the Bill introduced in another place by my honourable friend Archie Norman to deal with such a problem?

§ Lord Sainsbury of Turville
My Lords, we have a good deal of sympathy with the objectives behind Archie Norman's Bill but there are extremely important questions about how it would work in practice. Predominantly, the fundamental point is that it would interfere with contractual rights and that would raise serious issues. The Government have agreed to consult on the matter because we consider it to be an issue of importance. However, the Bill requires careful examination if it is to be made to work in practice.

§ Lord Wedderburn of Charlton
My Lords, does my noble friend agree that he is telling us that a 1229 government who are prepared to pursue abroad an uncertain moral case to the brink of war will not lift a pusillanimous finger effectively to curtail the licentious appetites of fat cats which workers throughout Britain recognise very well and which cast a stain upon the moral fabric of our society?

§ Lord Sainsbury of Turville
My Lords, I do not agree with the first assumption about an uncertain moral case. As for the rest of the Question, one needs to consider carefully the consequences of governments becoming involved in trying to determine the salary levels of directors. As my noble friend rightly said in his question—and answer—excessiveness is extremely difficult to determine other than by two parties freely making a contract.

§ Viscount Slim
My Lords, is the Minister aware that my friend, the noble Lord, Lord Dormand of Easington, always frames his questions as though every chairman, every director and every manager is helping himself from the till? Is he aware that today many managers, particularly in manufacturing—an area in which I used to work—are not receiving pay rises and sometimes receive less than they received the previous year?

§ Lord Sainsbury of Turville
My Lords, it is fair to say that the situation is variable in different sectors of the economy. Nevertheless, directors' salaries are still rising faster than inflation. The major area of concern to many is rewards for failure. There is an almost unanimous view that, if possible, that should be stopped. The right people to stop it are the shareholders.

§ Lord Maclennan of Rogart
My Lords, would the Minister consider it interesting to circulate the findings of his noble friend, the noble Lord, Lord Layard. on the connection between remuneration and happiness? It is not all that shareholders sometimes believe it is.

§ Lord Sainsbury of Turville
My Lords, my noble friend gave an interesting series of lectures. Whether there is a connection between remuneration and happiness is a philosophically interesting point. Unfortunately, when negotiating contracts for jobs most people put that consideration to one side.

§ Lord Dubs
My Lords, my noble friend said that dealing with excessive rewards for failure in British industry—surely a blight on this country—should be left to shareholders. How confident is he that the mechanism for decision-making by shareholders is adequate to deal with rewards for failure?

§ Lord Sainsbury of Turville
My Lords, in a number of cases shareholders have shown that the issue is of concern to them and much pressure has been placed on that point. That is why it is extremely important that they will now have the automatic right to vote on the remuneration report. The answer to excessive rewards for failure concerns getting the contract right in the first place, rather than having a bad contract and 1230 trying to correct it through legislation. It seems to me that the Association of British Insurers and the National Association of Pension Funds' recent best practice guidelines on directors' contracts and compensation is the right way to go for shareholders.