Letter: The PRP promise never came true

Sir: Your City Comment column (25 July) speculates that Chancellor Clarke might start to target the tax relief on profit-related pay (PRP) following his attack on the tax break on share options. He should be encouraged.

Nigel Lawson's original enthusiasm for the PRP idea came from a book by the US economist Martin Weitzman, who suggested that if a reasonable proportion of the remuneration that employees received went up and down with the firm's profits, then in recessions firms would not lay people off. He even claimed we might have permanent full employment!

As your article says, we now have millions of people on PRP, costing the taxpayer pounds 800m a year. Yet the recent recession shows us that, to the degree that Labour market flexibility has increased, it simply means that firms sack earlier in the economic cycle. There is no sign of increased stability of employment levels across the cycle that PRP was supposed to deliver.

The other main benefit of PRP is supposed to be closer employee identification with the firm, leading to increased productivity (the so-called "boy-scout effects"). Yet there is very little evidence for this hoped-for result from any form of performance-related pay, still less from the type of profit-related pay the Government scheme encourages.

The Treasury has been weak in letting this monster get out and even worse, letting it grow. Contrast this to its attitude to public investment in things like railways, where the economic benefits are manifest. It has also been weak in not commissioning extensive work to establish whether we get any value for money from the PRP tax break at all.

We hear so much about the dependency culture these days, but much of it seems to be a dependency on market-distorting tax breaks for those already in jobs.

Yours faithfully,

Dan Corry

Senior Economist

IPPR: Institute for Public Policy Research

London, WC2

25 July