Leading article: Fairness is more than fine words

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The Independent Online

Since this newspaper expressed dismay at the scale of Stephen Hester's pay last week, the boss of RBS joined Sir Philip Hampton, his chairman, in turning down his bonus. It was a welcome gesture, but it was only a gesture. Just as stripping Fred Goodwin of his knighthood last week was a gesture. It does not deal with the larger problem, which is that the taxpayers who own the banks disapprove of the level of their executives' pay; or with the still larger problem: that pay in the financial services sector is seriously out of line with most people's idea of fairness.

It was alleged, when Ed Miliband, the Labour leader, made these arguments in a speech last week, that he risked being anti-business. The Independent on Sunday is no more against successful businesses in competitive markets than are the British people. Indeed, we are in favour of incentives to work or to work more productively, and we are in favour of the market economy. But if incentive schemes are not working, they should be dropped, and if markets fail, one of the functions of government is to put that right.

Thus, as an employer, the Government is entitled to demand evidence that bonuses do actually raise performance. That applies to the £100m bonus pool available to reward public servants on which we report today. Furthermore, as the controlling shareholder in two banks, the Government must ask about the effectiveness of their bonuses and long-term incentive plans. Not least because so many in the City seem to think that "bonus" comes from the Latin for "expected" and that "long-term incentive plan" stands for "complicated scam for obfuscating pay rise without raising base salary".

Beyond that, the Government should worry about the gap between the very rich and the rest. That did not seem so important during the long Blair boom, when most of the poor and most of the growing middle class felt they were getting better off. But now, with the middle squeezed, and the poor starting to feel the sharp edge of cuts, Labour's failure to challenge the City of London when it provided tax revenues looks more foolish. Inequities that might have been tolerated as the price of general prosperity are now seen as an insult. Such intolerance of inequality can only become worse. The Institute for Fiscal Studies pointed out last week that 88 per cent of George Osborne's benefits cuts are yet to come. That means that the bonuses that may be paid to officials in local government and at the Department for Work and Pensions, responsible for most of the cuts, need to be handled especially carefully.

Yet this is no anti-capitalist or anti-business sentiment. The banks are able to afford distorted levels of pay only because they have been bailed out, directly or indirectly in the case of Barclays, by the British taxpayer. If the market had been allowed to work, they would have gone bust. Whatever they are being rewarded for, it is not successful risk-taking.

That means, in turn, that David Cameron should act on his own rhetoric of empowering shareholders – in the case of the two state-controlled banks, us. But it also means that the Government should change the rules of the market more generally to reflect the more testing demands for fairness in straitened times.

Mr Miliband made two modest proposals in the House of Commons last week. One was that banks should be required to disclose the names and earnings of employees paid more than £1m in a year. The other was that a shop-floor employee should be on every pay committee.

To the first, Mr Cameron replied that it "should be done at the same time in all countries across the European Union"; to the second, that "it breaks an important principle of not having people on a remuneration committee who will have their own pay determined". Such reasoning would make Billy Liar blush. Indeed, most arguments against greater openness and accountability are specious.

Mr Cameron was forced last week to withdraw the unparliamentary charge of hypocrisy against Mr Miliband. He should realise that it is he, with his unconvincing protestation that we are "all in it together", who is most vulnerable to that accusation.