Vince Cable’s threats won’t beat excess pay. Only real sticks will do that

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Vince Cable is trying to play tough on executive bonuses. According to press reports he's said that either businesses must take action to curb them or the government will. It's a pretty hollow promise for at least six reasons.

First, this has been said before and nothing's happened.

Second, this comes from the government that has gone to Europe to defend the right of banks to pay extortionate bonuses.

Third, the government is turning a blind eye to the blatant evasion of the EU bonus cap.

Fourth, this government no longer has time left to it to legislate on almost anything new.

Fifth, given that this government so heavily endorses big business cronyism and the capture of both state and private income streams by those who have no entitlement to them for their own private gain no one can take a word it says on this issue seriously.

Last, it's toothless. Where is the sanction? What threat is being suggested? If it's another suggestion that all pay must be shareholder approved let's forget any chance of change; institutional investors don't cap pay because they want to be part of the gravy train.

So what is needed is real reform, and that does mean sanctions.

Some time ago - at least as far back as 2009 - I suggested a policy to the TUC that has remained its policy since then. This was to impose a cap on the amount of pay that any group of companies could make payment of to a person and still get tax relief on it. My suggestion was that the limit should be set annually and be ten times median pay for the previous year. Median pay in the UK is about £26,500 at present. So this would mean no group of companies could pay anyone more than £265,000 a year and get tax relief on it.

Pay would, of course, have to be widely defined. It would have to include salary, bonuses, all benefits in kind such as cars, pension contributions, share options and so on.

And the rules would need to be right to make sure that excess reward was not paid by service company contracts instead. That would take some interesting drafting for legislative purposes, but could be done.

And I would suggest that when introducing the law disclosure in a company's accounts of the number of people to whom the cap applied and the amount of remuneration not subject to tax releif should be made mandatory. It's transparency that imposes constraint.

The result would be straightforward. The cost of paying higher pay would increase. That would not be by chance. It would be deliberate for three reasons.

First clear signals have to be given as to what is considered fair pay in the UK. This measure would deliver that message - and I defy anyone to say pay of above £265,000 is needed.

Second, it stops the UK taxpayer subsidising these excessive rewards by giving tax relief on them.

Third, it makes clear that those who make such payments are likely to be partaking in a process of corporate capture where some in a company are capturing the value added within it for disproportionate personal gain. And that's a powerful message.

Will this government deliver on this? I think there is no prospect of that. But I do not see why we cannot have hope for the future. Something has to change and this is a case of delivering something that is possible.

PS I am aware that this cap would not apply to rewards paid by owner directors as dividends in private companies - but then these are, in economic terms, not salaries but profit distributions and so are not the focus of the policy I am suggesting, which is meant to address excess salary payments.