Vince Cable's pay reforms are only a first step

http://www.guardian.co.uk/commentisfree/2012/jun/20/vince-cable-pay-reforms

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It is a condemnation of British society that children can go to school hungry while top bosses' pay rose to an average of £4.8m last year. Even at a time of heightened scrutiny and biting austerity, our corporate leaders increased their pay packages by 12% in 2011/12 when wages for everyone else in the private sector were up by 1%, according to a survey by Manifest and MM&K.

Large pay disparities are bad for business and the economy, as well as for society. More unequal societies suffer higher levels of social unrest and increased morbidity rates. The gulf in pay rates that now puts chief executives on 190 times average wages, feeds a widespread feeling of unfairness and the sense that the wealthiest are not shouldering their fair share of economic distress. It also undermines public trust in the corporate sector.

There is a groundswell of public opinion behind the need to tackle excessive pay and politicians of all persuasions have condemned payouts for failed executives. Vince Cable, the business secretary, says today there is a "disconnect between pay and performance in companies". Shareholders have also found their voice at last and started to speak out against excessive awards when company performance has been mediocre in recent years. But even against this backdrop, there have only been six votes by shareholders against top packages this year and these votes are purely advisory so can be ignored by company bosses.

Cable wants to give shareholders more power to tackle top pay. This is why he is bringing forward reform measures announced today as part of the enterprise and regulatory reform bill.

However, Cable has been nobbled by company bosses keen to retain their discretion to pay millions. He has shifted his proposals, for an annual binding investor vote on upcoming pay plans, to a three-year say on remuneration policy. The danger with this is that shareholders just get to take part in another box-ticking exercise rather than voting on real detail.

Cable's other proposals would introduce the requirement on boards to produce a single figure for what a top executive earns in any one year and agree executives' exit payments with shareholders. Hard as it is to believe, a single figure for what a boss earns is not something that is currently available. This is why, for example, you get amounts ranging from £6m to £27m for what Bob Diamond, boss of Barclays, took home last year. As bosses' packages have become ever more complex, it has become harder to work out what exactly they will be paid once bonuses, complicated share awards and pension contributions have been added up.

The government pay reforms are an important first step in tackling top pay and must be implemented properly to be effective. However, it is stretching credibility to expect them to bring down top pay to a more reasonable level. It is doubtful that shareholders will be able to stop the arms race in pay on their own. Some resent the time it takes to plough through pay reports in order to have an informed vote on policy. Some just don't care.

Employees have as much interest in a company doing well as its owners. Their very livelihood is under threat if they are sacked, and most do not have a multimillion-pound cushion from previous bonus awards. They deserve a place at the table where pay decisions are taken – to remind the remuneration committee about workforce wages where bosses' pay is soaring. Cable has, however, ducked the issue of remuneration committee reform.

Some of Britain's more perceptive executives realise that pay has become a toxic issue – undermining public trust to such an extent that it could even threaten their licence to operate in the UK. However, many live in a bubble surrounded by people like them, with little recognition of how hard it is for many families to make ends meet.

There is a need for a broader public policy debate about pay and inequality. We need to decide what sort of society we want to live in. These reforms are a start, but there is much further to go. On current trends, Britain risks becoming even more divided, and if little is done to check the ratcheting up of top pay, we will have returned to Victorian levels of inequality within 15 years.

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