Thursday, 12 January 2012

Curbing senior salaries

David Cameron started the political year with a tough approach to curbing senior pay packages and not before time. His proposals have been criticised by some, including the Daily Telegraph, as interfering in the market but I think that is rubbish and he is right to take on these vested interests.

Real leaders lead by example and are the first to make a sacrifice for the cause. So what has gone wrong in Britain's board rooms? At a time when people in both the private sector and the public sector are accepting pay freezes, all too often we see pay at the very top of organisations running out of control. Last year, the average salary of a Chief Executive in 87 of Britain's largest companies was up by a third to over £5 million while performance at many had stalled. The banks have failed on such a catastrophic scale that they have had to be bailed out by the rest of us but still they have the audacity to pay themselves huge bonuses and lecture small businesses about management.

The truth is that in both the private and the public sectors, there has been a lack of accountability and this has allowed a high-pay culture to develop. These high salaries are not driven by market forces but by a failure of market forces. In recent years, so called head-hunter agencies have had a field day, stoking up pay awards at the top and taking huge commissions themselves. Not enough power has been given to shareholders or elected councillors to veto pay packages.

The answer is to restore accountability so that this artificial, high-pay culture is punctured and market forces come back into play. Last year the government announced that, in future, local authorities would have to put pay awards of senior officers to a vote of full council so that every councillor takes direct responsibility for what is agreed. If council tax payers think that senior officers are being overpaid, they can hold their own councillor to account. It won't change existing contracts overnight but it will restore accountability and drive down senior pay in future.

But we also need to do the same in the private sector, giving shareholders the power to veto salaries. It is extraordinary that, despite owning the company, shareholders’ views are only considered “advisory” at present and things are decided by cosy remuneration committees instead. Many people own shares in companies indirectly through their pension fund and these institutional investors have been too soft on senior pay in the past. So we also need to improve transparency so that the people who actually put their own savings on the line can demand action to cut pay at the top and restore some common sense.

George Eustice can be contacted at george.eustice.mp@parliament.uk or 1 Trevenson Street, Camborne, Cornwall TR14 8JD or by telephone on 020 72197032.