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.
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Hi Richard,
Just a quick spello – in para starting ‘ And I would suggest’ relief is mispelt 🙂
Sorry – typos are part of this blog!
I think I corrected five of those this morning – I’ll now hunt down the other
The press may as well report that “King Canute” is to advance his agenda on “wave control”…
Richard. As with Cable’s announcement earlier in the week on ownership and registration of companies, I have no doubt that this is nothing more than LibDem PR in advance of the EU elections, and, more importantly, our own elections next year.
As you rightly point out, Cable has been talking tough (ha, ha) on these two issues – and many more – since 2010 but not a jot has changed. He’s now akin to the boy who cried wolf too many times, and even less effective. Nevertheless, the LibDems will increasingly have to do anything they can over the coming year to try to illustrate that they’ve been anything other than a Tory lapdog and apologists for the largely appaling policies of the Tories.
We can expect ever more desperate examples of this after their impending wipe-out at the upcomimg EU and local elelctions. And we can perhaps expect even more of it from Cable as he tries to position himself to take over leadership of the LibDems after the next election. Assuming he survives, I doubt he’ll need more than an average size dining table to use to host meetings of the remnants of the LibDem. party.
And oh, how Cameron, Osborne and co will laugh. They’ve been sustained in power, pretty much free to do as they please, and will leave behind a legacy of hatred, division and destruction that will take years to undo, while simultaneously ensuring their coalition partners get wiped out as a political force. Outstanding (if you’re a Tory)!
Good analysis
And greetings
No problem with the sentiment but I think this is a blind alley. I have heard all this distribution by law approach before. I don’t think it matters what levels pay and other perks are, so long as they are taxed properly. That’s a big “so long as” I admit, but I think it the best way forward.Talented people can make millions or billions for an economy, and they need to be here in the UK. We need the 1% – but on negotiated terms.
I’m not saying they can’t be paid
I’m saying we should not subsidise them
What’s the problem with that? Simple, effective and necessary
Richard
“I’m saying we should not subsidise them”
Of course, you are not ‘subsidising’ anyone. All the figures show that it is the wealthy who are subsidising the rest of us. If I were an employee whose actions had earned my employer (say) £1m you are saying my employer should be penalised if it wants to give me half of that? A £500k bonus would generate tax and NIC of c£300,000 but you’d rather chase such jobs out of the UK? Fine, people would go and work in other countries.
Talk about the politics of spite and envy.
“I defy anyone to say pay of above £265,000 is needed”
I look forward to seeing the Premier league staffed by players earning less in a year than the best now earn in a week.
Your picture of the society you want to see is such a sad one.
No one will leave the UK – that’s the idle threat always made by those who abuse this country for personal gain whose supposed contribution does, all too often, seem to be poor performance for the companies that they manage, before leaving with a giant golden handshake and pension pot.
As for football, no footballer needs £265,000 per week, or even £30,000 a week. If the Premier league has to work in a different way or with reduced pay because it has to pay tax on the excessive salaries it wishes to pay to its staff, so be it. I suspect that the benefit would be enormous: for a start there would be something approaching a level playing field, and that is always good for any competition, a point you very clearly forget.
And, as for the envy…… no, it’s just too tedious to explain to someone who clearly has no comprehension that those of us who think all are of worth are the least likely to suffer from this debilitating human condition
Chris- we HAVE the sad society already-haven’t you noticed it:
1) Whatever the rich give in taxes is disproportionately OFFSET by the damage done by wealth extraction (asset bubbles, offshore tax, liquidity used in foreign investment)
2) The reason footballers have become an asset bubble is to offset the fact that the owners of these clubs have bought them via gross levels of leverage so they need to inflate the value of footballers!
3) The rigged market does not allow for real price discovery therefore commodities become more expensive.
4) The share value of banks is ENHANCED by deposit insurance and the BoE being lender of first(!) resort -the cost is borne by society again.
No envy is involved in this is your stereotypical knee-jerks response assumes. many of us concerned about social purpose and social equity come from a mind set that someone like you seems incapable of conceiving of. No doubt you still cling to the dinosaur belief of trickle down wealth!!
“No one will leave the UK”
People have. Anyone with even a vague grasp of tax history will know that penal tax laws cause people to leave. And a cap on salary such as you are suggestion would see employers leave in droves.
And why would anyone come here?
As always, your simplistic analysis will appeal to those who want to hear what you are saying but they wouldn’t work in the real world and, thank goodness, will never be tried.
I have not suggested any cap on salaries
And of course people leave
And many others come to replace them (you may have noticed)
But most of all, people of ability stay
So stop talking nonsense, or please do not call again
Its not for the government to ever tell business what or how to pay people.
So you think we should scrap the minimum wage?
And allow child labour?
And equal pay?
And paid holidays?
And sick pay and maternity pay?
Interesting…..
Do you get paid sick pay??
I’m self employed
Isn’t this effectively double taxation though, a point you argue effectively against in many other blogs? You are arguing for additional tax for the employer (via no ct deduction) and presumably 50pc tax plus ni for the employee
I’m confused. Where do you stand on double taxation, is it a good thing or a bad thing?
Yes this would result in double taxation – to discourage a social harm
I am entirely relaxed about tax being used for that purpose
Thanks for clarifying. So tax paid by a tax exempt pension fund is presumably bad if I read your definition correctly. The current beps debate and the tax treaty discussions will lead to this result unchecked (and it’s not being properly debated). I know you can’t cover everything but it’s disappointing you haven’t had time to do a proper piece on this
The US is riding roughshod over Europe and nobody seems to care
I have to say I am not following what you are talking about?
I have a couple of questions:
If this was applied by all UK employers won’t there be a substantial reduction in income tax & NI received? How will this be recovered?
Does this apply to non profit organisations and public services, charities etc, and what would the ‘punishment’ be for (say) a local authority or a government department paying someone £500k?
I’m not seeking to cap pay
This is about tax relief
And how many people in charity and government earn more than £265,000?
Shall get real here?
What about the self-employed? How would your limit work for them?
Under your idea, a company paying (say) £1m to an executive would result in a disallowance of £735,000 and additional corporation tax of in excess of £154,000.
An LLP with £1,000,000 profit to distribute to a partner would suffer no such penalty giving it a tremendous business advantage.
I am not saying profit should be limited
I am saying excessive pay should be
They are not the same thing
Isn’t that a rather curious argument to make though? If that is really what you mean then you must be the first left winger on record to make that argument.
What in effect you are saying is that shareholders should get the fruits of someone else’s labour.
For if you limit pay (or try to limit pay, through the tax system), what you are saying is that profits available for distribution to the shareholders should be increased. The workers will thus get less slice of the pie. Are you happy with that?
And you didn’t answer the question raised above. If an employee earns their company a £1 million (through winning a contract, or performing exceptionally, etc), why should the employee not get half (say) of that? Why should the employer keep it?
Your argument makes no sense.
I have no problem with the concept of profit fairly earned (and that is a massive caveat)
I have serious problems with it being taken by those who have not earned it
Maybe you have not noticed what’s happening at Barclays?
If not, why not open your eyes?
So if someone has performed well as an employee at work and is paid £1m you say it sends out the wrong message and so penal tax rules would apply to discourage it.
But if someone has done exactly the same thing but working as a partner in an LLP and their profit share is £1m, you have no problem with that and no penal tax rules would apply.
That seems an odd stance to take, morally.
In answering Oliver, you say you have no problem with profit fairly earned but your suggested rules do not take that into account at all and would apply regardless of whether the salary was ‘fairly earned’ (whatever that means).
‘Fairly’ earned salaries would suffer a tax penalty, the same income generated within an LLP, even if generated in a way you consider ‘unfair’ would not suffer a tax penalty.
I’m not sure your suggestion has been fully thought out.
One is an employee
The other has a profit share
Very different – especially now tax rules have been changed
So it’s not the substance of the actions of the individual but the form that counts?
A member of an LLP can have as much money as he or she likes and that’s OK. £1m, £2m, £3m doesn’t matter. No moral message, no need to show they don’t need that much money, no worry about the supposed ‘subsidy’ by the taxpayer of their lifestyle.
But if the LLP were to incorporate and carry on the same actions, it’s morally important that the income an employee receives should suffer penalties at a corporate level if it’s above £265k?
Have you read the new rules on partnerships as they wouldn’t stop such a scenario? A fixed profit share partner in a one member/one vote LLP would ‘not meet’ the condition of S863B ITTOIA 2005 and so could cheerfully receive a pre-agreed £1m and the business would not be penalised under the rules you wish to impose. However, an individual doing exactly the same thing in a company and receiving £1m would result in a tax penalty to the company of over £150k, something necessary to send out the right moral messages.
I’m sure many readers of your blog would struggle to see the difference.
I really think you have no clue what you are saying
You cannot have a one member LLP for a start of a single member LLP with a fixed profit share
And what I am saying is genuine risk taking is nothing like employment
Maybe you also don’t know that
‘I’m not seeking to cap pay’
‘I am saying excessive pay should be’ (limited)
Surely the whole ethos of your proposal is to force companies to restrict pay levels through tax ‘penalties’?
If the market exists (ha, ha) pay will not be restricted, and more tax will result
If it’s rigged that’s another matter
Either way the outcome is beneficial to society
Surely you could achieve the same effect by the creation of an appropriate new income tax band? The incidence would tend to be the same, and I would think it would be much simpler to administer.
The aim is pay
Not necessarily all income