Labour’s stance on high pay leaves the ball firmly in Vince Cable’s court

The appearance of cross-party consensus in politics usually makes me welcoming and wary in equal measure – welcoming as it signals a weakening of the fierce discord between political tribes, wary because the sheen of consensus often betrays a deep underlying suspicion of the ability of any party to take on the challenges they face.

Excessive remuneration appears to be the latest issue on which the three main parties appear to agree – it apparently unites the hitherto unlikely trio of Vince Cable, Ed Miliband and, latterly it seems, David Cameron around the recognition that extremes of pay are damaging not only for individual firms but for the economy at large and should be tackled somehow by government.

These arguments, made by many for decades, were crystallised in the outstanding final report from the High Pay Commission in November – a report that I argued should be welcomed and actioned by the Lib Dems. Yesterday, Shadow Business Secretary Chuka Umunna set out the Labour party’s response to the report in a speech to the IPPR and ICAEW that endorsed the HPC’s recommendations. He emphasised the pernicious effects of excessive executive pay, but stopped short of ‘those dangerous lefties at the Financial Times’ and their ‘Capitalism in Crisis’ series. It is perhaps this reluctance of Labour and Tory leaders alike to recognise that the core of our political economy is rotten that leaves a golden opportunity for Liberal Democrats in government to implement our vision of a fairer, more sustainable economic settlement.

From the comfort of opposition one would hardly expect anything other than a full endorsement of the commission’s findings from Labour, and while the speech swung from point-scoring politics to economics seminar, there was little doubt that Labour intend to press the Coalition into action on high pay – and that their own complicity in allowing pay inequality to soar will barely be acknowledged. In addition, although Umunna gave hints of some interesting proposals that go further than those in the Commission’s report, he provided scant detail of how Labour would go about implementing any of them – again, the ease of flying kites in the absence of the constraints of power comes to mind.

So where do Liberal Democrats seeking to put fairness front and centre in the Coalition’s record go from here? To me the emerging consensus on the problem of high pay belies pretty big differences in how the three parties think it can be tackled. Cameron feels that retrospective but binding shareholder votes on remuneration will suffice – not likely, I’d say. Similarly, Umunna focussed on getting shareholders to exercise greater fiduciary responsibility, as did his discussant the former City Minister Lord Myners – but as the Commission Chair Deborah Hargreaves pointed out, most shareholders only hold very short-term interest in a companies’ fortunes and so aren’t in a position to care about high pay. This is why Jonathan Hunt’s call earlier today for the true holders of risk – people who hold pension funds and other investments – to have a greater say in company matters should be heeded.

There’s a bigger opportunity here for Liberal Democrats and for Vince Cable in particular who has lead the debate on fairer capitalism – an opportunity to reform how power, risk and  reward are distributed amongst all the stakeholders in a business, from shareholders to employees to society at large. Labour can fly all the kites it wants, but it’s the Vince and the Lib Dems who will take this chance to make our economy fairer.

* Prateek Buch is Director of the Social Liberal Forum and serves on the Liberal Democrat Federal Policy Committee

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7 Comments

  • jenny barnes 13th Jan '12 - 4:05pm

    The sensible thing to do with these extremely highly paid people is surely to tax them? It’s a wider social problem, not something that individual firms should worry about. In a globalised free trade environment, highly skilled professional and executive staff in the UK will see their pay rise, and low skilled people will lose out, either no work at all or much lower pay, because of competition from China/Inda. But as a country, there’s a net benefit … so shouldn’t the individual beneficiaries bear their share of making life bearable for the losers?
    It’s mostly luck, one way or the other, which category people are in.

  • Richard Swales 13th Jan '12 - 10:17pm

    Would we also limit the level of dividends/profits paid out to businessmen/traders/owners?

    If not then why not? An employee is just a trader with only one client, why should they be discriminated against?

  • I don’t agree with Richard that an employee is just a trader with only one client. Employees are at risk of losing their job, but not their savings. Taxing salaries (or quasi-salaries through sham consultancies) but not profits at a higher rate would encourage able senior managers to back their decisions with their own money, instead of taking risks with other people’s money like Fred the Shred did with £45 billion of RBS shareholders’ savings.

    A nice move which wouldn’t formally involve raising taxes would be to treat salaries in excess of say £150,000 (the same as the Prime Minister) as not wholly, necessarily or exclusively for the purposes of the business and so not tax-deductive, unless the employer could demonstrate that such a high salary could meet certain tests. And have an outright ban on higher salaries in the public and not-for-profits sectors.

  • Prateek Buch 14th Jan '12 - 8:57am

    Interesting comments that somewhat miss the point – the battleground in centre-left politics is shifting away from discussions of how to tweak the tax system to how we ensure risk and reward are fairly distributed before HMRC gets involved.

    I’m sorry Richard I don’t follow, please explain further….

  • Richard Swales 14th Jan '12 - 9:07am

    @Paul K – I go into various companies and teach them English (I live abroad, but what follows applies everywhere), now I have more lessons and other British people work for me doing the same. I have a limited liability company. How am I risking my savings? – which I didn’t have when I started anyway.
    In the case of new businesses we are in a kind of post-capitalism, where ideas are the most important investment not financial capital – you can’t analyse companies like Facebook in terms of return on initial capital invested (it’s mathematically possible to get a number, but it doesn’t descrive what’s happening).
    Or perhaps profits from start-ups of the type where the “means of production” are a a PC, a suit and someone’s mouth and therefore already in most people’s hands should be capped at the maximum employee salary too?
    In any case, now that we are VAT registered the state makes more money from my business than I do, so I am wondering at what point the “stakeholders” (i.e. people who have never applied to work for me and never bothered to start anything similar themselves) will be satisfied that my take is low enough to be “fair” – I sometimes get the impression that even after all the 12 hour days I have put in, for some people fair means that everyone has exactly the same.
    The 150 K test would be passable though because the salaries of chief execs clearly are for the benefit of the business. We are told (not by Paul K from now on) that many shareholders are short-term oriented. This is true, but the current value of company is the net present value of future profits (predicted profits adjusted for tax, interest etc). In other words, if you are able to save a company 500K per year by capping the CEO’s salary at half a million less than it is now, then you increase it’s profits by the same amount and increase the current market value of the company by 6-10 milion overnight, allowing the short-term shareholders to cash out with a smile on their faces. The reason this doesn’t happen (and why such a move would not automatically raise the market value of the company’s shares), is that it would have a perceived impact on the likely future quality of the management of that x-bilion worth of company and therefore reduce the predicted profits by more.
    Of course anyone is welcome to the opinion that it would have no impact (or maybe even positive impact) on the future quality of management and the view of the markets and pension funds is wrong about this. In which case I ask them if they have yet set up a SIPP (self-invested personal pension, basically a pension where you buy and sell the various companies yourself). If you get enough people to do it then you will find some companies change to attract you investment. Please test your ideas with your own money though, not with everyone else’s

  • Richard Swales 14th Jan '12 - 12:04pm

    @Prateek – the point is that why should one classification of earnings be capped or taxed at a higher rate than another, when the distinction between them is arbitrary? The idea that business (whether as a sole trader or an investor in a larger company or whatever) is inherently more moral than employment is something I have only ever heard from Ayn Rand (normally classed as right-wing) before, but even she didn’t support any government intervention to that end.

    As ever, when messing about with other people’s freedom, arbitrary injustices appear. If a manager works 5 days a week in the same company he is going to be classed as an employee under your rules presumably regardless of whether he is invoicing through some kind of consultancy company. What if he works 4 days there, and is a non-exec at another company 1 day per week? What if it’s 3 days, 1 day, 1 day with another company? What if it’s five companies with one day each? What if two guys are together in one consultancy firm and invoice their work in different places? At what point is he allowed unlimited earnings and lower taxes? Am I (with my language school) to be treated as a defacto part time employee of all the companies where I teach? I say the above not to pointlessly ask for more detail but to illustrate that you are attempting to disfavour something in favour of something else, when the distinction is totally arbitrary.

    Are these high pay proposals (I haven’t seen the full list of proposals) intended to apply to footballers and golfers too?

    Also that taxes are passe and centre-left politics has become a lot more dirigiste (what in Eastern Europe would be regarded as socialist, not centre-left) is an observation of current fashions, not an argument for why wage caps are better than taxes at achieving particular policy objectives.

  • jenny barnes 14th Jan '12 - 1:25pm

    prateek – I think your “missing the point” comment totally misses the point. Why come up with a complex and probably gamable way of adjusting the balance of risk and reward when we already have the tax system to balance out people’s luck – good and bad. I think your idea of where the “battleground” is needs some evidence; otherwise we have different policy proposals to achieve similar ends, ie Tax or rules on pay. I would argue tax is better, but I can see problems with tax residency arbitration. Maybe these CEOs are indeed “worth” several million a year to their companies. That’s fine. But to retain social cohesion we would want their take home pay to be some reasonable multiple of the median take home, I believe.

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