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Rose on pay and VAT

• Robert Peston
• 7 Jan 09, 03:37 PM

What should happen to business leaders' remuneration in this downturn?

Well Sir Stuart Rose, the chairman of Marks & Spencer, was characteristically blunt when I interviewed him earlier today.

"I certainly won't be taking a pay rise" he told me. "It would be inappropriate for me to do so...I am 99.99% certain there won't be a bonus. I certainly won't be getting anything over and above what my staff will enjoy."

As for the example that should be set by Britain's executive class in general, Rose said there must be absolutely "no payments for failure."

Which most of you may well say is common sense, at a time when almost every company tells me that it's either reducing job numbers or is about to do so.

But as we've seen over many years, common sense doesn't always rule in the board room when remuneration is being decided

I also asked Rose whether he agreed with Simon Wolfson, the chief executive of Next, that the government's emergency VAT reduction had been a waste of time and money (see my note this morning, "M&S: no ordinary downturn").

Rose, who is a member of the prime minister's Business Council, started by saying that he "doesn't do politics". But he then added that the VAT decrease has "not made a material difference to our sales."

Which some will see as a criticism of the Treasury, although Rose was at pains to point out that he felt the government was acting with the best of motives.

As for the Treasury and Number 10, they believe that criticisms of the VAT cut miss the point.

They say that the point of the reduction in the VAT rate from 17.5% to 15% - which lasts a year and will lead to a 拢12bn reduction in tax revenues - was not to boost the sales of M&S or any other individual retailer.

It was to put money into the pockets of consumers and businesses, at a time when households are feeling strapped for cash and when companies' profit margins are under pressure.

The VAT reduction has done that - but, perhaps, only as an uninteresting matter of definition.

Where retailers pass on the VAT cut in the form of lower prices, that represents an increase in the real value of our disposable income. And where firms have maintained their VAT-inclusive prices (and loads of restaurants and leisure groups haven't passed on the cut), that's a boost to their profitability.

Either way, there are cash benefits to households and businesses from the VAT reduction.

But what's much more interesting - and what's hotly debated - is whether the VAT cut is the best possible use of that precious 拢12bn for the purpose of dampening the magnitude of the economic contraction we're experiencing.

And that's where the remarks of Wolfson and Rose are relevant.

The Treasury cut VAT partly to stimulate economic activity in the private sector. It hoped that the 拢12bn of foregone revenues for the Exchequer - and the corresponding increase in public-sector debt - would generate incremental revenues for business and would therefore protect jobs.

If substantial retailers like Marks and Next say the VAT cut hasn't stimulated trade to any noticeable extent, that matters (although it is not beyond the realms of possibility that Marks and Next are wrong).

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M&S: no ordinary downturn

• Robert Peston
• 7 Jan 09, 07:58 AM

Is Marks & Spencer the true story on the high street or a bit worse?

The is certainly pretty dire.

The famous like-for-like sales, which show sales per square foot in older stores, are truly horrible - with general merchandise 8.9% lower in the 13 weeks to December 27.

However, it's probably the trend to unadjusted, overall sales that's more disturbing.

For the group as a whole, these were 1.2% lower, thanks to a particularly strong performance outside the UK and on the internet.

But here's the ghastly bit: overall UK sales were down 3.4%, including the benefit of Marks' well-publicised and unprecedented promotional days.

Clothing was the worst performer, with sales 6.5% lower. Food was just 1.1% down - which represents a modest recovery.

Also, the profit margin of Britain's largest clothing retailer was significantly lower, because Marks has been forced to slash prices.

Sir Stuart Rose, Marks's chairman, expects the bad times to last at least a year.

So he's closing 27 less profitable stores, shedding 1,230 jobs and making the pension scheme less generous. He's also taking a knife to investment, with capital spending falling from 拢700m this year to no more than 拢400m next year.

This is pretty savage stuff, designed to keep the group profitable during the worst high street downturn for almost 30 years.

Marks' profits this year are expected to slump around 45% to a bit over 拢600m.

So the days of laurels and awards for Marks' well-known executive chairman probably feel to him like a lovely distant memory.

Update 0839: It's rare that Simon Wolfson, the chief executive of Next, makes public utterances. And perhaps today we know why, because he certainly stirred things up a bit this morning , when he criticised the government's emergency cut in VAT.

This reduction for a year in the VAT rate, from 17.5% to 15%, will cost 拢12bn. It's supposed to help groups like Next, Britain's second biggest fashion chain, by encouraging all of us to spend a bit more.

But Wolfson said that the expensive VAT reduction was a mistake, that it was a waste of taxpayers' money, and that the Treasury would have been far better to cut income taxes if it wanted to encourage spending.

A well-known Conservative supporter, Wolfson also raised serious concerns about the government's central economic policy, of spending more and cutting taxes to combat the contraction in our economy. He's very worried about the consequential ballooning of public-sector debt - and he believes that, like Next, Gordon Brown could do more to make the public sector more efficient.

Quite rightly, he was at pains to point out that the difficulties on the high street are a recession, but not Armageddon - and that groups like his and like M&S remain solidly profitable.

In which context it's as well to point out that Marks has managed expectations among its investors of what to expect from its results in a characteristically astute way.

Although its trading update was hardly uplifting stuff, its shares have risen a smidgeon this morning.

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