Richard Mabey: The wider debate about bankers' bonuses is about income inequality - and we can win it

Richard Mabey is Research Secretary of the Bow Group.

Sometimes governments get so bogged down in the minutiae of policy making that they lose sight of what they set out to achieve.  With a portfolio of domestic crises, and international conflicts raging, the risk of the Prime Minister becoming a firefighter rather than a visionary is omnipresent.

Just occasionally, however, an opportunity comes along that can be a vehicle for real reform: reform that is proactive rather than reactive.  An example of such an opportunity stems from the recent debate over directors’ pay at RBS.  In the Stephen Hester debacle, comment was generally about how much say the public should have over its own capital, RBS being owned largely by the state.

In spite of the arm’s length terms on which pay was supposed to be set, Stephen Hester bowed to media and political pressure and the saga is now over. But Ed Miliband in recent weeks has been keen to widen the debate.  The claim the Labour leader is now making is that the state should have a say in the setting of executive pay at all banks, not just those owned by the state.  This, on the basis that the State may have to bail them out in the future.  It is part of his rhetoric on "One Nation Banking". 

In response to a couple of reports from (the official-sounding but actually unofficial) High Pay Commission and the Institute for Public Policy Research, the Government put forward in January a package of reforms, which were intended to correct any market failure that might have occurred in the setting of pay at RBS but also at listed banks and, indeed, all other listed companies.  The package of proposals has been a cornerstone of the Prime Minister’s very own soundbite doctrine: "Responsible Capitalism".

In our briefing paper, Remuneration Nation: Responsible Capitalism and the Wider Issue with Executive Pay, sent this week to all MPs, we broadly welcome Vince Cable’s proposed reforms to the setting of directors’ pay.  The response was a nudge, and it will empower shareholders to have a greater say over how their capital is used.  As the Government clearly asserted, UK companies are in a global competition for talent and intensive top-down regulation on pay will likely cause more problems than it solves.

The Business Secretary’s proposals were reactive and intended simply to patch up a market failure.  We do not think that the Government should stop there, however.  Firstly because, for the reforms to work, we will need to see far higher levels of shareholder activism than we see at present, and secondly, and more importantly, because we do not think that this is what the public anger and the debate are all about.

Responsible Capitalism so far?  Well, sort of.  The reforms clearly speak to responsibility for capital.  And shareholders are clearly the best people to look after their own capital.  But what about responsibility to society?  And here lies the opportunity.  If people are angry about other people getting rich, as Conservatives our instincts might tell us to say to those people "get over it".

But how can we, as Conservatives, meaningfully engage in that debate?  The answer is relatively straightforward.  The executive pay debate is really only a branch of the debate over a far more important social ill: income inequality, being the difference between rich and poor. This is a problem that should be firmly on Conservatives’ radars.  And it can be tackled from the top down, as Ed Miliband suggests in his "One Nation Banking" doctrine.

But Mr Miliband’s argument is very clearly the cradle of a non-sequitur.  It simply does not follow that because the Bank of England may be lender of last resort that the state must impose itself further in the setting of pay.   The more interesting response is to look at the issue from the bottom up.  How can we decrease income inequality by tackling poverty? How can we decrease income inequality by empowering citizens to progress up the pay scale?  These are issues that the state should be getting involved in and require, instead, some thinking about meaningful welfare policy and removing the barriers to social mobility.  If the Government is truly serious about "Responsible Capitalism", it must shift the debate away from bankers and to those who really need state action.