Vince Cable is right to focus on executive salaries. We need to force investors to take on management.
By Christine Berry
In today's speech to Liberal Democrat conference, Vince Cable spoke of the need to build 'responsible capitalism': to ensure that the City serves the real economy rather than the other way round, and that rewards to all are fair and proportionate. It’s welcome to see a senior politician go beyond the banks and acknowledge the need to address a wider malaise exposed by the financial crisis. If the government's mantra of a return to 'balanced and sustainable growth' is to become a reality, we need financial markets that focus on contributing to that growth, rather than artificially inflating next quarter's profits.
According to a government consultation, published today to coincide with Vince's speech, from 1998 to 2010 the average pay for FTSE 100 CEOs rose from £1m to £4.2m. This is astronomically higher than either the growth of the FTSE itself, or returns to savers: pension funds' real returns averaged just 1.1% per year over the same period. The picture painted by these figures is not of a properly functioning market in executive talent but of an arms race – overseen by remuneration committees made up of the very same people who benefit from it. Addressing this perceived injustice is clearly critical to restoring the system's popular legitimacy.
But responsible capitalism is also about accountability. And that’s why Vince’s proposals for improving shareholder oversight of top pay are so important. Amid huge popular concern about excessive top pay, many do not realise that the shareholders entrusted with holding executives to account include our pension funds and insurance providers. When spiralling top pay coincides with stagnating returns to savers, these shareholders have a responsibility to challenge it.
Currently, shareholders have an advisory vote on remuneration packages. Today's consultation suggests making this vote binding – something FairPensions has long argued for. This would be a significant step forward in enabling shareholders to stand up for savers' interests and curb excessive pay. But it would also be a challenge to the investment industry itself. Three years on from the onset of the financial crisis, there remains a reluctance among many investors to vote against company management. If this year's advisory votes on UK firms' pay packages had been binding, not one of them would have been voted down. It's true that shareholder activism on pay is increasing – but it will need to increase much more if the proposed binding vote is to deliver practical change. Government can and must give shareholders the tools to hold companies to account. It's up to us, the savers whose money is ultimately at stake, to make sure they use them.
Christine Berry is policy officer at FairPensions.
The opinions in politics.co.uk's Comment and Analysis section are those of the author and are no reflection of the views of the website or its owners.