CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 304-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

PUBLIC ADMINISTRATION COMMITTEE

 

 

EXECUTIVE PAY IN THE PUBLIC SECTOR

 

 

THURSDAY 30 April 2009

MS POLLY TOYNBEE, PROFESSOR TONY TRAVERS, MR DAVID CLARK
and MR BEN FARRUGIA

Evidence heard in Public Questions 1 - 101

 

 

USE OF THE TRANSCRIPT

 

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

 

The transcript is an approved formal record of these proceedings. It will be printed in due course.


Oral Evidence

Taken before the Public Administration Committee

on Thursday 30 April 2009

Members present

Dr Tony Wright, in the Chair

Mr David Burrowes

Kelvin Hopkins

Mr Ian Liddell-Grainger

Julie Morgan

Mr Gordon Prentice

Mr Charles Walker

________________

 

Examination of Witnesses

Witnesses: Ms Polly Toynbee, The Guardian, Professor Tony Travers, LSE, Mr David Clark, SOLACE, and Mr Ben Farrugia, TaxPayers' Alliance, gave evidence.

Q1 Chairman: Welcome to our witnesses this morning. The Committee has decided to do an inquiry, amongst other inquiries, into top pay in the public sector, an issue which is causing some interest at the moment. This is the first session in that inquiry and we wanted to hear some views, some perceptions, that we could then test against the evidence later on. We have brought together what we hope is a mixed panel to give us a set of interesting perspectives on this. We are delighted to have Polly Toynbee from The Guardian; Tony Travers from the LSE; David Clark from SOLACE, the Local Government Association; and Ben Farrugia from the TaxPayers' Alliance. In the context of this inquiry there are two related questions: Is there an issue about what is happening and what has happened to top level pay in the public sector? And, if there is an issue, what might be done about it? I would like to ask each of you to tell the Committee whether you think, first of all, that there is an issue here that warrants any attention.

Mr Clark: Quite evidently there is an issue, in that it would not be in the public domain so often were there not. If you look across the public sector, one of the things on which my organisation, the Society of Local Authority Chief Executives and Senior Managers, draws wry smiles is that concentration on the local government side, which is one of the very few areas where democratically elected people can determine the wage level, whereas if you look across to other things that really are in the public sector, such as university vice-chancellors and whatever else who earn more, for some reason they are not in the public domain as a debate so much. In a time of recession one of the things my colleagues are very clear about is that there is going to be a degree of envy about that and some understanding that somehow these people are protected. In fact I think it was a good parliamentarian who said that it was "getting out of control, it was like football managers" and I do not think he knew how right he was, because of course the thing about chief executives is that they get sacked quite a lot if they under-perform. I am sure here you will have had civil servants, and maybe they do not get sacked as often - I do not know, you would know more about that than I do. Yes, I think there is an issue. We have suggested to John Healey that we ought to publish what chief executives of local authorities earn in detail, but that it should be published alongside what they do in detail. I think everybody on the Committee - forgive me, possibly with the exception of yourself - has been a councillor, and when I was a councillor in the 1980s I did not know what the chief exec did for the four years I served as a councillor. So I think there is an issue of transparency, but it is not just about pay, it is about activity too. That would be my view.

Q2 Chairman: Thank you very much for that. Polly, is there an issue?

Ms Toynbee: Yes, I think there is an issue. I think people are very concerned if they see what they consider to be large numbers of people earning more than the Prime Minister, for instance. It seems to be a rule of thumb benchmark where it just does not seem reasonable, and you might find lots of reasons why it was or was not. I think, though, it is unfair to look at it in isolation from the general culture outside. What you have is a relatively small leakage from the extraordinary escalation of pay differentials over the last 20 years. For instance, the Institute of Directors themselves produced figures for CEOs to show that, over the last 20 years, average CEO pay compared to their average workforce went from 15 times to 75 times. That is just within a period of 20 years. When you see that explosion of top pay, mostly in the top one%, it is not surprising that there is some leakage. In fact, in some ways it is surprising, perhaps, that there is not more. According to the TaxPayers' Alliance's own figures, only 387 people in the public sector are earning more than 150,000, so it is not a huge number of people, given how many public sector workers there are, but I do think it is a symptom of a much more general disease and that you should be looking at it in the round.

Q3 Chairman: Is the conclusion from that that you should attend to the source of the leakage rather than the leakage itself?

Ms Toynbee: I think both. I think that if you are going to make a comment about it, it would be appropriate to say that is an inevitable outcome and perhaps you should be looking quite hard at what is happening out there as well. I do not know if that is beyond your remit.

Q4 Chairman: Very likely, unfortunately, but thank you for that. Tony.

Professor Travers: In brief, there clearly is an issue. This inquiry is evidence that there is an issue. In part - and the point has already been made - the debate about bonuses and private sector pay understandably threw light then on some of the top public sector pay, some of which had been rising quite sharply in the last two or three years and probably because of a sort of contagion effect reading across from the big rises in some parts of the private sector. I think all that has got caught up in the wider public debate latterly which has a slightly Maoist tone to it, a slight sense that all high pay is now bad and everybody should be pulled down a bit, and so it is an issue. It simply is an issue in public debate.

Q5 Chairman: Thank you. Ben.

Mr Farrugia: I think there certainly is an issue and our concern at the TaxPayers' Alliance is the large examples of rewards for failure that we have seen. As was said earlier on, chief executives are frequently fired, but we have found plenty of cases where they then move on to higher paid jobs somewhere else. They are fired for incompetence and they move on to a superb job somewhere else with even better benefits or they are fired with enormous compensation packages. That is our concern, these very inflated salaries. Attendant to that is the lack of transparency. We find it very difficult to get those figures which Polly quoted. I think there should be a much larger public scrutiny of these figures which are very hard to get. For instance, there was the story yesterday about the gentleman from CDC earning almost 1 million. That is something that we would find it very difficult to find out even at the TaxPayers' Alliance. It took a committee to find that out. I think we need much greater transparency and far greater scrutiny and many less cases of these simple rewards for failure.

Q6 Chairman: Do you accept what has been said, what Tony called the "contagion effect"?

Mr Farrugia: I certainly acknowledge it. I think it has certainly been a factor.

Q7 Chairman: At the TaxPayers' Alliance you seem only to be concerned about things like levels of pay in the public sector. Things like tax avoidance and tax evasion you do not seem at all interested in.

Mr Farrugia: Our concern is the public sector and government. That is our focus. I am sure there are plenty of excellent groups focusing on tax avoidance and tax evasion, which are a private sector issue. I think our campaign team have put out some comments on tax avoidance and tax evasion which are both negative things that we do not approve of, but our focus is the public sector and pay is one of those things that is symbolic. It speaks to people. They understand it. People do not understand the complexities of some of those things.

Q8 Chairman: Those of us who pay taxes are quite interested in those people who do not pay taxes, are we not?

Mr Farrugia: Absolutely. But we all know about tax avoidance and tax evasion because Polly and The Guardian, for instance, have done extensive work on tax avoidance. That is their focus and ours is the public sector. The one particular issue we have been focusing on in the past year or so has been pay.

Q9 Chairman: Before we go on to talk about what we might do about it, let me ask whether there is agreement that, whatever else, we just need to know what is going on. The TaxPayers' Alliance has done important work in tabulating a lot of this, but there seems to be an emerging consensus that, whatever else, we just need to know the figures across the board. Is that a consensus?

Professor Travers: It would be very, very difficult to defend not having these figures in the public domain. It is public money, they are public institutions. Not having the numbers readily available, certainly for senior managers at the top of institutions, is going to be pretty difficult to defend, so I think it is an inevitability.

Mr Farrugia: I am pleased that David said that they are now supporting John Healey's call for local government ----

Mr Clark: We said it before John Healey.

Mr Farrugia: Okay. I am pleased about that too. Our experience and my personal experience of dealing with council chief executives is that they are incredibly reluctant and they will use any means possible to withhold the information. They do not want it out in the public domain and I am pleased now that they might be forced to do so. It is not an experience that we have had, this openness. There is no desire for transparency among many chief executives. Of course, I am generalising. There will be some who do and some who are very forthcoming, but there is a sense that in some parts of the public sector they want to hold on to this information.

Q10 Chairman: Do we know which part of the public sector is worse in terms of this transparency? Is it local government? Has it been local government?

Mr Farrugia: It has been local government. I hope that changes. Despite a lot of negative comment about non-departmental public bodies and other quangos, they tend to be rather good and annual accounts tend to have very good annual remuneration reports. Our problem is the extent of the public sector. So much of it is the grey area. We do not know what these bodies are or who they are and consequently we cannot pick them out and investigate them. But, yes, so far it has been local government that has been the hardest nut to crack.

Q11 Chairman: Does anyone else want to say anything about the transparency issue before we go forward?

Mr Clark: I am an ex-serving chief executive, in York. The day came when I said to my sons that I was moving to London, and they said, "Does that mean you're not going to march with the Army any more, daddy?" and I said, "I'm awfully sorry, yes, it does mean that," and they said, "Yes, but it's good isn't it, the children in the playground won't keep shouting at us because you earn so much money, will they?" Of course, in a city that size - it only has a population of the London Borough of Bromley - everybody knew how much I earned. It was advertised at the time when I applied for the job. The local papers ran it. There is quite a lot of transparency in a lot of areas, so I would not want to get away with this idea that we are just moving from this age of secrecy to an age of enlightenment. In a lot of places, it has been like that anyway.

Q12 Chairman: Let me just tell you that the hounding of MPs in the playground is far in excess of anything you ever experienced.

Mr Clark: It was never a career I wanted to pursue.

Ms Toynbee: On the question of transparency, though, I am not quite sure why we would want to be extra transparent about the public sector without a little bit more transparency perhaps in the private sector as well. There should be a culture of people essentially expecting to know what other people earn, where they stand within their own organisation, where they stand within their own occupation. I think there has been, in recent years, much more secrecy than there used to be about people knowing roughly. All the polling evidence is that people miscalculate where they are on the earnings scale much more than they used to. Perhaps in the days when trade unions were more vocal, people understood more what other people earned. I think, for democratic reasons, that is important.

Q13 Mr Prentice: Most of us here earn about 64,000 a year. Do you feel able individually to tell us what you earn? I ask that question, Polly, because you said why just the public sector, why not the private sector. Should not our tax returns, everyone's tax returns, be put to the public domain? It happens in Sweden. People running for elective office in the United States disclose that information.

Ms Toynbee: I think it is a very good idea. I mean, it would be a huge culture shock at first.

Q14 Mr Prentice: It would.

Ms Toynbee: It would be like nudism, everybody taking their clothes off, but if everybody did it at once, the shock would last a year or two.

Q15 Mr Prentice: Just do not go there.

Ms Toynbee: I think it would be a very good idea. I do not mind saying what I earn, but I think it is a taboo that is quite dangerous at the moment. If you want to know what I earned: I just received my end of year thing from The Guardian and it said I earned 106,000.

Q16 Chairman: It is good to have the question but I am not going to press the answer - unless you are going to volunteer, Tony?

Professor Travers: "If only" I will say. I think the point you are making is a good one. This is a sort of taboo. What is interesting is we are discussing about making public and agreeing about making public some numbers which, in general in society, are a slightly awkward taboo. It is not a thing people discuss widely in public. That is why there is a sort of grating noise when you are discussing it.

Q17 Chairman: Yes. We talk rather readily about the public sector without perhaps stopping to think the public sector is a rather different beast than it was a generation or so ago. We are getting submissions from bodies that we think are in the public sector - and you mentioned university vice-chancellors - who tell us, "We are not, we are private organisations." Some describe their particular status, which means that they are in a special category. Of course the whole trend of policy has been to move in that direction, to create all kinds of disaggregated kinds of bodies. It is a much more variegated public sector now than it once was. Is not the implication of that that you will have much more variegation and, as it were, self-determination in the pay structures?

Mr Farrugia: Yes. Absolutely. I definitely accept the fact that in an enormous varied, as you say, public sector, with very different jobs, from a university vice-chancellor to the head of a police force, you are going to get very different needs, very different candidates and very different pay scales. I think you have touched on a point that we need more clear lines of where the public sector is. The man on the street has no idea where the public sector begins and ends, and the reason these stories build up so much steam is that people are shocked when they find out that these people are getting paid with taxpayers' money. That is the key.

Professor Travers: I agree with that, but it is even more complicated, I think. There are now, because of successive governments' policy, a significant number of companies that are, for want of a better word, "parastatal"; that is, they only exist because the public sector buys services from them. Answering the question of whether some of those companies are really in the private sector, when they get 100% of their work, let us say, from the public sector, is a very, very awkward one. Public-private partnerships have made this a very murky piece of territory indeed to say where the public sector ends and the private sector begins. If you start then setting general rules for which pay is and is not revealed, you will undoubtedly find a large piece of grey territory in which it is very clear that the TaxPayers' Alliance will have a lot of trouble deciding who to look at and who not.

Q18 Chairman: Are you talking about companies like Capita?

Professor Travers: Yes, companies of that kind, but in fact there are more complicated ones than that. If you look at, say, the companies that were in one case rebuilding the London Underground, the public-private partnership companies for that, they were created solely to do work which is 100% public sector work and yet they are in the private sector. It is very complicated. This has had problems, of course, for public sector accounting which other committees have had to look at in the context of what is on and off balance sheet.

Mr Farrugia: It is very complicated, but if I may bring it back to the transparency issue, if the public sector led the way in having incredibly transparent pay, in terms of in their annual accounts, for instance, then hopefully they would set an example for the private sector and even these parastatal bodies would set an example that everyone else would follow.

Q19 Chairman: Does anyone else want to come in?

Ms Toynbee: On the question of comparing public and private pay, I think the TaxPayers' Alliance sometimes use an amalgamated figure that is very deceptive. If you add up all of the public sector workforce together and divide it by the number of people and you do the same for the whole of the private sector, the public sector comes out as very much better paid, and you think "Good heavens." until you realise that nearly all the low-value, low-pay jobs have been outsourced. The dinner ladies, the porters, the cleaners and all of those people are not any longer in the public sector technically, which makes these comparisons very difficult. Whereas the private sector, on average, has eight% professionals, the public sector is now very much more professionalised (because it has outsourced its unprofessional/non professionals) and has something like 24% professionals. Those crude comparisons look very alarming to the public, but it is a very unfair way of averaging things out.

Chairman: Yes. We have been reading your spat with the TaxPayers' Alliance and enjoying it hugely. We are hoping it will continue because it will provide us with good information.

Q20 Julie Morgan: The Equality Bill is going to be introduced a week on Monday, the second reading, and that of course will ask for, at the first stage, voluntary pay audits. I think there is going to be more openness as a result of the Equality Bill. Obviously the purpose is to illustrate the gender pay gap that does exist, as we know, in many places. I wondered on this transparency issue whether you think that this will be a step forward.

Ms Toynbee: Definitely. It is a small step, but yes.

Q21 Mr Walker: I think that there does need to be something done in the public sector to curb pay at the very highest levels. To balance that, I recognise there are head teachers paid 120,000 who do a simply outstanding job. They have changed the prospects of children in a way that would have been almost unimaginable a decade ago. I think we need to temper the argument here. Do you regard the TaxPayers' Alliance as the sort of witch-finder general riding into the public sector and crucifying people and driving stakes through their hearts? Sometimes it does seem like that. Your rabid hostility to anybody working in the public sector seems odd.

Mr Farrugia: I think that is slightly unfair, in so much as I certainly hold no hostility towards particular people in the public sector. I think we are probably the only group who are pursuing this voraciously. I feel that perhaps there is room for more people to be doing so. At the moment we are the only people standing up, investigating this and putting it to the press and putting it to the people, and saying, "These are the facts. This is the data you can get from published accounts. You make up your own minds." I know it has been interpreted that we have this kind of blood-lust for the public sector but I think that is unfair.

Q22 Mr Walker: But it is not unfair. The danger of the TaxPayers' Alliance is that you are clearly a very studious, academic gentleman, but the way the TaxPayers' Alliance allows itself to be represented in the press is really as just a rent-a-quote organisation. If the boot needs to be put into the public sector, be it civil servants, Members of Parliament, anyone in the public pay, get the TaxPayers' Alliance to it and they will put the boot in. Does that ever concern you, that sometimes the TaxPayers' Alliance does allow itself to be portrayed as a rent-a-quote organisation as opposed to a serious, research-based think tank?

Mr Farrugia: It does not concern me because I work in the same office with the people who are providing the quotes to journalists and they are not doing that. Journalists come with stories for them and I strongly believe they are representing a true and honest opinion which I think quite a lot of people in the public hold as well.

Q23 Mr Walker: I notice your Chief Executive Matthew Elliott has worked in the public sector. He was a researcher to an MEP.

Mr Farrugia: He was.

Q24 Mr Walker: Paid by the taxpayer. How does he feel about Members of Parliament and MEPs paying researchers out of their staffing allowances? Because we get a lot of grief from the TaxPayers' Alliance. I think it was 125,000 last year I trousered, when, in reality, 103,000 of that was paid to my excellent staff. Surely Matthew Elliott knows that because he has been paid by the taxpayer out of a European parliamentary allowance.

Mr Farrugia: I am afraid I am not here to speak for Matthew Elliott. I have no idea where his particular feelings are on this issue. I only have mine.

Q25 Mr Walker: It is funny that his experience does not seem to colour his thinking. Anyway, moving on, Polly Toynbee, of The Guardian, I do not agree with much of what you believe in but I respect your right to believe in it, but what are your concerns about the public sector? You are the champion of the public sector but when you start having concerns about the public sector that sets alarm bells ringing with me. Where specifically do your concerns rest within public sector pay inflation? Is it in the sort of uber managerial class that has appeared over the past decade that seems to be extremely busy and working very hard the whole day through doing perhaps not much?

Ms Toynbee: I think it is not the sort of superheads turning around very difficult schools. As you have said, it was 387 earning over 150,000. I think that at that level there is a danger of them losing touch with what is ordinary any longer. I think it does cause public concern. I do not want the public sector to be brought into any kind of disrepute. I think perhaps the honours system had something to do with this. There used to be a system where you got honours for public sector because you were, on the whole, paid less than somebody doing as difficult a job. As David said, there is hardly a more difficult job than to be chief executive of a really complicated, large county or inner city area, where you are covering a vast array of quite different things, with quite different demands, where you go from child protection to schools to social care for the old to running your streets and your parks. Not many executives in the private sector, where they only have one target, which is their bottom line, have to deal with anything as complicated as that. I do not think that means that they should therefore be paid more, but I think they deserve more respect. Sometimes the respect comes from not perhaps being paid quite so much but from people recognising that they are public servants who want to do it - which is true of most of them. They are not in it for the money, they want to do it because it is an honourable thing to do. I think perhaps the honours system should recognise this and there should be rather fewer honours for bankers, fewer honours for people who earn monstrous sums of money - I cannot see why they get honours as well - and rather more honours for people doing public service, for being paid less for very hard jobs.

Mr Farrugia: I think Polly makes an interesting point there. If you take local government chief executives, if they have now chosen to pay themselves private sector wages, essentially, for their jobs, then they are going to lose that kind of respect because no-one is going to think they are doing it out of duty, they are going to think they are doing it, quite rightly, perhaps out of their own self-interest. I think that is a very important point: if we are going to have this duty, then people have to believe it and being paid a private sector chief executive wage does not tell people that is what is going on.

Ms Toynbee: Not all of them are. They are still paid a great deal less than chief executives in FTSE companies.

Q26 Mr Walker: There are some salaries that do make my eyes water. Is it British Waterways where four people are earning over 400,000 or something? That just seems remarkable.

Mr Farrugia: They would argue that they do a lot of mainstream commercial work and so consequently their salaries reflect the mainstream commercial business, but they are funded by the taxpayer. Yes, they make money from selling land along our lovely canals, but the majority of their funding comes from the taxpayer.

Q27 Mr Walker: I wish I had known about those types of jobs before I decided to become a Member of Parliament. Anyway, thank you very much.

Mr Clark: In the local authority chief executive world, they are not paid anything like their opposite numbers in the private sector, nor indeed some public sector jobs. You are right, people do not go in it for the money; on the other hand, I can report that there has been rather a good thing to come out of the TaxPayers' Alliance work - I never thought anything good would, but it did - and that is that we run a graduate scheme and the number of graduates thinking of local government as a career as a result of thinking you can earn decent money there, so that you do not have to go into banking or anywhere else, has really gone up. So every cloud has a silver lining, as far as SOLACE is concerned, on the subject of pay.

Q28 Chairman: I would like to hold on to an important point that Polly raised just then and Ben agreed with, because, if it is true, it has quite important implications. It is this idea that if public servants start earning these very large amounts of money, then it devalues the currency of public service. The way that people see them and see their organisations may change. If that is true, that really does have profound implications, does it not? Do you think it is true? Tony, do you think it is true?

Professor Travers: There are not that many of them in the stratospheric league. I agree there are some. I think the reason that some of them started to go upwards was because there has been significant pressure from governments of both parties, as it were, for the public sector to use more private sector expertise, and that has, at the margin, involved looking at the private sector to bring people in. You can see that headhunters, or whatever they are called, in doing that will have jollied up the pay a bit in order to try to tempt people in from the private sector. There have been some significant and highly paid people within the private sector, and it is all a complicated set of steps that have led to these big jumps in a small proportion of private sector pay. But, overwhelmingly, chief executives in public sector institutions are not paid those stratospheric sums. There is a small number. The Prime Minister as a benchmark is actually a good one, I think, and where they do get way above that level it will corrode and erode the way people look at public service because the figures do not make sense. I think Polly used that term "do not make sense".

Chairman: I represent a small district council area and the chief executive of the small district council earns twice what I do. Obviously people think that is wholly unfair and they want me to be paid more, but it causes quite a lot of comment of a negative kind locally, that this person running this small district earns that kind of money. I just sense that it does corrode the way that people perceive local government.

Q29 Mr Prentice: But why should he not - if it is a he - be paid twice what you are paid? That begs all sorts of questions. Exactly the same is true in Pendle, which is a small district council in Lancashire, where Steven Barnes, the Chief Executive, earned 125,770 in 2007-2008. When people reflect on the salary that Mr Barnes gets, they think, "Well, over the years, he has lost responsibility for housing" - council housing has gone over to Housing Pendle - "he has lost responsibility for leisure services" - all leisure services, swimming pools and so on, have gone over to Pendle Leisure Trust - "all back-office functions in the local authority have gone over to the private sector Liberator, and yet I do not think his salary, over the 16 years that he has been Chief Executive, has dipped in any one year to take account of the reduction in his responsibilities." I am looking at you, Tony Travers.

Professor Travers: We are tottering again on the edge here of the ravine marked "Comparability Exercises." You will remember from the 1970s the efforts to undertake what were in the end chaotic comparability exercises between different kinds of jobs in the public sector and private sector to try to decide what would be fair public sector pay. Your point is well made. You could go on with that kind of comparison: If a district council chief executive is paid 125,000 and the chief executive of a very complex, inner city council is paid 175,000, is one of them paid too little and the other too much or are they both paid too much? I am saying I do not know the answer to that question.

Q30 Mr Prentice: Very eloquently you are saying you do not know.

Professor Travers: It is as complicated as saying that it is a comparability exercise where we are now trying, as it were, to compare different sorts of public sector jobs with each other and all of them with the private sector, and I do not think those exercises have ever been very successful.

Mr Clark: I would agree entirely.

Ms Toynbee: A little earlier Tony brought up one of the causes of this. I think it is about comparability, in a way, but in a very negative way. In the private sector, as we have chronicled in our book, you have headhunters called in by private companies and the directors sit around considering: "Are we an upper quartile company or a bottom quartile company?" and they all say, "We definitely want an upper quartile person with an upper quartile salary." The same thing is now happening in the public sector too. David knows about this. People are being headhunted from a very, very small group of people. They say, "We want someone who already has experience of running a very large county," and that is only going to be a small number of people. If you are having all these counties competing in a tiny pool, that is a self-inflating mechanism for pay. I think the role of headhunters in both private and state sector ought to be looked at in the course of your investigation.

Mr Clark: It is also the role of government. I am interested in what Gordon had to say. Presumably you would think that he might get some more if the Government gives him another unfunded mandate to deliver and that would be equitable. What is happening in a number of cases - and we have seen it - is that leaders of councils, often large shires, when they lose their chief exec, publicly say, "We only want somebody who has been the chief executive of a county council before and it must be an excellent rated county council." Then you look around and that is nine people, five of whom are nearing retirement. Once you do that, you are going to get spiralling wages. One of SOLACE's positions on this is that councillors are a little risk-averse. If you were in Lincolnshire, for example, they have a chief executive, an excellent chap called Tony McCardle. Prior to that he was Chief Executive of Wellingborough District Council. He is doing an excellent job and he is never quoted as on a big inflated salary - much to his disgust actually, but, nevertheless, he is not. If councillors realised that there is quite a lot of talent out there, in districts as well as in other areas, and were prepared to take bets a little more, it would not have the impact. I think it is one of the perverse effects of all this strange CAA-ing and CPA-ing and whatever else, where people get stars and all of a sudden you think, "Right, I have to have somebody who already has the stars," but there is not much evidence that that is true.

Q31 Chairman: That is interesting.

Mr Farrugia: We are often told that these executives such as SOLACE represents could walk out of their jobs and walk into excellent private sector jobs, and I have no doubt they could walk into excellently paid private sector jobs as consultants. But there are very few who have genuine private sector experience. I know Tony made a good point that in some quangos there have been people brought into the public sector who have inflated wages, but by and large we see career public servants who have never been tested in the private sector justifying their pay on the grounds that they could just leave and go and earn fantastic money elsewhere, and so they deserve this. That is a concern for us, because where is the proof of the pudding?

Q32 Chairman: We have business appointment rules in the Civil Service because private companies are queuing up to take former civil servants.

Mr Farrugia: I would like to see that in local government. I would like to see some local government chief executives and some large regional quango chief executives who are there to promote business, who genuinely have a business background and who can say, "I was earning 1 million and now I am being paid 100,000 to do this public service."

Professor Travers: I do not disagree with that, save I would like to add a footnote. The reason the comparability is so difficult is that it is very difficult to compare the jobs. Among the many things that are difficult to compare are the downside risks if things go wrong. I completely accept that in the private sector the downside risk of things going wrong is bankruptcy and that is a very bad thing for the companies concerned, but certainly in some parts of the public sector, the downside risk of things going wrong is total ruin. If things go wrong in some parts of the private sector, the risks to the executives concerned are very, very great indeed, both for them personally but for their long-term reputation. I am not saying you can price that but they are very difficult things to compare.

Q33 Mr Prentice: My Chief Executive - and I do not have a fixation about the Chief Executive, I just do not - was awarded, I see from the stuff produced by the TaxPayers' Alliance, a retention payment of 15,366. It gets back to the point you just made, David, about councillors being risk averse. They want to hold on to the person they know. Are these retention payments common place in local government?

Mr Clark: No. They occasionally appear when parliamentarians have decided to reorganise local government, because the danger that you have in reorganisation is that everybody jumps ship into the new, and the old one that is being closed down has nobody running it. There are times when they are used and it is usually around where there are major reorganisations and you do not want the new reorganised councils to steal all your staff. But they are not common place - you know, a handful.

Q34 Mr Burrowes: Is not the public sector out of step with the private sector in relation to, for example, salary increases? Should we not be taking a leaf out of Obama's book in having a pay freeze for White House staff? In terms of showing a lead, would it not be right for Gordon Brown to be insisting that in Number 10 they take a similar pay freeze, like the private sector is having to do, given the recession?

Mr Clark: I still hold to a belief that local authorities are individual sovereign bodies. Whitehall may do something if it wishes to do so itself, but I suspect that you did not take many orders from Number 10 when you were an Enfield councillor because that was not how you would have experienced this in a sovereign body. I do think - and certainly my organisation has already been talking about - "What should we be saying professionally?" I accept that this is a decision which definitely lies with elected members and elected councillors, but, professionally, we take the view that in a recession like this it is very hard to justify pay awards at all.

Q35 Mr Burrowes: But more particularly Number 10.

Mr Farrugia: Yes. I think you make a very good point. I hope Polly would agree that, when senior executives are discussing with frontline staff about cutting their pay, it would make much more sense to go into those conversations saying, "We are freezing our pay" or "We are cutting our pay. We are shouldering this pain with you." We have not seen evidence of that.

Ms Toynbee: I think that is true. You cannot underestimate the power of gesture, quite often, when you are in a national crisis. I think the higher top tax rate was in that category, in a way. It said, "We're all in this together. We share the pain fairly." I think that what Obama did in the White House was very sensible in that context, and I do not see why we should not have more of it here. In terms of public or private, it is important to remember that, according to England Data Services, the cycle is different in pay for public and private sector, and often public sector is countercyclical. In 2008 the private sector average pay increase was 3.8% and the public sector 2.7%. It will probably reverse itself this year and maybe next, but then when things pick up it will go the other way again, so you need to look at it over a reasonable span of time. I think gestures for top people is a good idea - I think you are right - but in terms of overall pay, I think it is important that ordinary people in the public sector do not fall too far behind and that you look at the different cycles.

Q36 Mr Burrowes: We have spoken about the particular examples in relation to town hall chiefs, so let us take the example of the Cabinet Secretary. Should he be paid more than the Prime Minister?

Mr Farrugia: I think he might be one of the cases where evidence could be put forward that he has an extraordinarily complex job with very particular responsibilities that mean he should be paid at least equal to, if not around or in the range of the Prime Minister, if not a little above. I do understand that he gets paid significantly more currently. Even at the TaxPayers' Alliance, although hard for some members to believe, there are certain people who are going to demand higher pay than the Prime Minister, but the Prime Minister is going to be a useful benchmark. Anyone over that should be considered extraordinarily well paid in the public sector and there must be extraordinarily good reason why they are being paid more than that.

Q37 Mr Burrowes: Polly, you have said that you feel there is something wrong with any public servant earning more than the Prime Minister. Is the Cabinet Secretary included in that?

Ms Toynbee: I do not quite see why he should not be. It seems to me odd, because, after all, you have come all the way up through the Civil Service, you have not come from somewhere else, so I find it odd.

Professor Travers: Being Prime Minister of the United Kingdom, because of the centralised nature of the state, is a very, very exercising job. It is a bit like being Mayor of England in some ways. You are almost an executive running everything, responsible for every bedpan in every hospital, and so on. I think that makes the argument for the Prime Minister being seen as some kind of a limit pretty powerful.

Q38 Chairman: As an extension of this, if we are tossing the idea of benchmarks and such like around, what about this idea that there should be some connection between the top earner in an organisation and the bottom earner, that there should be some kind of ratio that would bound the range of salaries? Does that make sense?

Ms Toynbee: It is a bill that has just been brought into the House of Lords by Lord Gavron and Lord Taverne and I think it is a very good idea. All they are suggesting - a very modest proposal - is that at the front of every company report, on the front page, it should say what the relationship is between the highest paid person in that company and the average of the bottom ten% of people working in that company. It might be that we get some incredibly well paid cleaners shortly! Again it is transparency, making people think about that as a first step before you start to implement something. I think it should apply equally to public companies and to the public sector.

Q39 Chairman: Would that make sense in local government, to have an explicit ratio between the chief executive and the lowest paid worker?

Mr Clark: I suppose you could try it but I think we are back to that problem that Tony describes, which is the fiendish complexity of local government. Let us take Gordon's example of Steven in Pendle.

Q40 Mr Prentice: Oh, not again.

Mr Clark: Oh, yes. I mean, I like Steven, so ----

Q41 Mr Prentice: He is not going to speak to me.

Mr Clark: No, I know - not after I tell him, anyway. If you look at what they are doing in partnership with Liberator, a lot of staff are now employed by Liberata - which is a good company and it seems to be doing a good job as far as I can see. Their Chief Executive, of course, earns significantly more than Steven, by a ratio of four, something like that. Where would you do the comparison? Would you do the comparison with the people who were working in that Liberata part or with the people who were working in the leisure part - all of which is held together in a partnership, as you know, which Steven and the leader chair? How you would do it is tricky. It sounds attractive and so we start looking at the fiendish complexity of all the people who actually now deliver public services, even in a relatively small place like Pendle.

Professor Travers: On the back of a mental envelope, if you were to compare, certainly in local government currently - and Ben may know the answer to this - in a sense the top pay compared with, say, the average pay, is going to be in a ratio of, I do not know, four, five, six to one. Typically 4:1, 5:1, 6:1. In some parts of the private sector the ratio would be very different. It would probably be much bigger. But, again, because of the comparability problem, I am not sure whether, when we knew that, it would tell us quite as much as you would hope. That is all I am saying.

Mr Farrugia: My concern would be that it would pull wages further up and significantly.

Professor Travers: It would pull them up.

Mr Farrugia: It would pull them up, because as has been implied, I think a lot of the lower paid workers in the councils have now been farmed off, and, as you implied, a lot of the services are gone where there would be lower paid workers. Of course there are lower paid workers in local government, but, increasingly, we see people creeping into that 50,000 plus. Increasing numbers. Every year, year on year, tens in every council are added on. That would be a fear we have.

Q42 Mr Prentice: I have just been reading Polly's book Unjust Rewards. You tell us that the tolerable ratio - the person on the most modest salary and the top earner - is 14:1 and if it goes above that then presumably it is intolerable. Then you quote Sir Terry Leahy at Tesco. He gets 400 times what the person in the checkout presumably would get and the boss at Punch Taverns, Giles Thornley - this really is eye-watering - gets 1,148 times the minimum wage. That is what you tell us in your book. I suppose my question is not to you but to Ben of the TaxPayers' Alliance: Do you think that is fair? Do you think that anything that happens at the private sector, even those kinds of ratios that I have just read out, is fair game?

Mr Farrugia: I think they are entirely to do with that particular company. I think they are their choice.

Q43 Mr Prentice: Their choice?

Mr Farrugia: It is their choice.

Q44 Mr Prentice: Their choice.

Mr Farrugia: They are a private sector operation.

Q45 Mr Prentice: Okay. You say in your evidence to us - and you are talking about the public sector - that managers enjoy "massive salaries". I would like you to tell me what you consider a "massive salary" today.

Mr Farrugia: I consider a massive salary for a manager to be anything over 100,000.

Q46 Mr Prentice: I see. But you do not have a view on "massive salaries" in the private sector?

Mr Farrugia: That is certainly a massive salary. Whatever Sir Terry Leahy gets paid is an enormous salary.

Q47 Mr Prentice: It is enormous.

Mr Farrugia: It is huge. It is enormous.

Q48 Mr Prentice: That is not something you would concern yourself about.

Mr Farrugia: It is set by Tesco. We pay for these public sector managers. You can choose not to shop at Tesco, if you so choose. Consequently Tesco will go bankrupt and Sir Terry Leahy will get paid nothing. We all have to pay tax and we all pay the public sector executives whether we choose to or not.

Q49 Mr Prentice: That is interesting, because we have a tax rate which is very flat indeed: top earners at 40 pence, which is going up if the present government is returned to 50 pence. If the Conservatives are returned at the next election, it will be going up to 45 pence. Just as an issue of fairness - fairness - do you think there should be a more progressive tax system in Britain, so that the Terry Leahys and the Sir Philip Greens and the rest of them who get stratospheric earnings, pay more into the exchequer?

Mr Farrugia: I think we have a very progressive tax system.

Mr Prentice: Okay.

Chairman: I do not want to get too wide on this. Gordon is leading us down avenues that we do not need to go down.

Mr Prentice: But it is interesting.

Q50 Chairman: Interesting. Always interesting. In the first discussion we had, Ben, I was slightly puzzled by your answer. I thought you consented to the leakage and contagion argument that we had right at the beginning of our discussion, and if you assent to that, which you did, then presumably you cannot say I am not concerned about what happens in the private sector, because if there is contagion presumably you want to attack the source of the contagion.

Mr Farrugia: If I understand, you are saying that stratospheric salaries in the private sector because of the contagion effect are going to have ----

Q51 Chairman: Yes.

Mr Farrugia: I think you certainly have a point there, but my focus is the public sector. I do not comment and I do not research on the private sector. If those are definitions - and I am sure other people much more informed than I can comment on them - my concern is that people pay tax, they have to pay tax, they do not shop with government, they do not choose these services, and these are salaries being paid out of general taxation, and so, consequently, I can comment on their salaries. I cannot comment with any strength on private sector salaries.

Ms Toynbee: So far as public companies are concerned, of course, most of that money is taken out of the people's pension funds, because most money in the publicly quoted companies is people's pension funds. It does not come from nowhere or from choosing to shop there or not. It does come out of the companies' coffers.

Q52 Mr Walker: Sir Terry Leahy is a constituent of mine. There are not many pension funds complaining about Sir Terry Leahy's performance, because he has delivered a huge return for them since he has been at the helm of Tesco.

Chairman: I have to bring us back to the main business again and I am going to bring Ian in, if I may.

Q53 Mr Liddell-Grainger: Tony, we have gone around this issue for the last hour and a bit, but where do we go from here? We have to have curbs. Do you say to chief executives and councils, "Look, I am sorry, this is what we are going to have. We are going to band the whole thing" - in other words, one stars or two stars or whatever you want to use. We have to come up with a solution to this problem. We have to say somewhere along the line: Do you take chief executives on one side, do you take quango chiefs on another? Do you have banding for every type of organisation within the public sector, which means that you will be into that band regardless of how many people are in it - whether it is Pendle or, in my case, Somerset, which are two different sizes?

Professor Travers: In the short term, the spirit of the age will clamp quite a lot of this pay - not just the spirit of the age but in fact there is going to be - again outside this particular inquiry - probably ten years of public spending constraint from next year onwards, or the year after onwards, and that will act as a very effective brake on all sorts of things in the private sector, including almost certainly pay. There will be a trade-off between pay and the number of people employed for quite a long time. Personally, I am not in favour of centrally imposed bands on these things. I said earlier on I do believe in publicity so that people locally and nationally can see what people are paid and then create political pressure about those numbers if they wish to as the Taxpayers' Alliance does and others here do in different ways. Having centrally imposed bands on all of this is not the right way to go, different people should be paid differently. If you are chief executive of Birmingham you should be paid a different amount set in Birmingham compared with the Head of the Health Authority in Newcastle-upon-Tyne. These things ought to have much more local freedom, if anything, because more local freedom would actually create more local pressure of the kind that apparently the ex-chief executive's children met in the playground and that would create local pressure for sensible pay.

Q54 Mr Liddell-Grainger: But, would it? I am going to ask Ben this now. What Tony just said was leave the press to do all the work and people like yourselves to come up with the answers. I have just been trawling through this and there are about 200 pages.

Mr Farrugia: Yes, almost.

Q55 Mr Liddell-Grainger: Nobody locally is going to listen to the Wolverhampton Wanderer weekly paper and say, "Oh, that's what he's paid, we must change that". Is that not unrealistic?

Mr Farrugia: I hope not. That would be a very low opinion of democracy. I would hope that people are reading their local papers, are reading their national papers, are hearing how much their local government executives are getting paid. There is one thing we have not discussed which is the pressure on councillors. David implied that councillors are a bit fearful and they want to hold on to their executives. My hope would be that local people would put pressure in elections on their local councillors saying, "Listen, when you get in we want you to put a brake on these salaries". That only applies, of course, to those which are set by ---

Q56 Mr Liddell-Grainger: Your boss worked for an MEP and I think he would tell you that does not actually happen in reality.

Mr Farrugia: That would certainly be my hope and the reason why we do the Town Hall Rich List and the Public Sector Rich List is to enable that. With quangos you have a separate issue because these people's pay are not ---

Q57 Mr Liddell-Grainger: Can I give an example, and David will probably get involved in this one. In Somerset we have had an unmitigated disaster with a deal with IBM, half a billion quid, it is an absolute fiasco. It was done under secrecy and nobody could find out what was going on. Somerset will not even come back to me with who the portfolio holders are. That is not getting into the public domain because the public cannot find out. That argument does not work because we do not know. I do not know as an elected representative, one of five MPs in Somerset.

Mr Farrugia: I think Tony and I would both support the steps taken by all three parties to say that they must do it. I should not have to send a request to Somerset asking to release the information, it should be there every year on their website for everybody to see.

Q58 Mr Liddell-Grainger: I will let you know the figures for those, incidentally. I do know them, so I will let you know.

Mr Farrugia: Thank you.

Q59 Mr Liddell-Grainger: It comes back to the argument that we cannot get at the truth anyway. My chief executive is paid more than 100,000, he will not release the information and the councillors are saying, "Oh no, we don't really want to do this" because it is a political football. So you are not going to get any further, are you, because Tony's and your argument of "Just let the press do it" is not going to wash.

Mr Travers: We have all agreed, I think, that it would be indefensible for the top pay not to be in the public sector. I suspect, without knowing anything about the deal that you are referring to ---

Q60 Mr Liddell-Grainger: That was just an example.

Mr Travers: --- that will have been enmeshed in complications to do with so-called commercial confidentiality. That is about a contract. In a sense, problems of commercial confidentiality, the public knowing things about big contracts that are being written, are somewhat different from the questions of what people are paid where I think we have all broadly agreed that publicity would be good and then the media would be able to ---

Q61 Mr Liddell-Grainger: Let us take another example, the Learning and Skills Council.

Mr Farrugia: Yes.

Q62 Mr Liddell-Grainger: Hopeless.

Mr Farrugia: A large failing quango.

Q63 Mr Liddell-Grainger: Farcical. That has not been changed by any public opinion, that is Government that has said, "We're going to split them into three different quangos".

Mr Farrugia: Yes.

Q64 Mr Liddell-Grainger: We have gone no further forward.

Mr Farrugia: Absolutely. If next year it emerges that the chief exec who recently resigned got a million pounds in pay-off, which is not out of the realms of possibility, then hopefully the Taxpayers' Alliance will put that out there and condemnation will fall down upon them because that is not right. That is our concern. If I could add something to the transparency argument, maybe in public sector executive contracts they have to be firmed up so we do not get these enormous payouts for people who have failed and who are proven to have failed.

Q65 Mr Prentice: That is going to be covered.

Mr Travers: At the risk of being rude to my hosts, is it not a fact that as the Learning and Skills Council is a national quango should not the ministers who appoint such quangocrats and committees of the House hold it to account. It is a national organisation, so if there is a failure I would have thought it is in the holding of that particular body to account where the problem lies.

Q66 Mr Prentice: Mark Haysom, who was responsible for those terrible cock-ups with the educational maintenance allowance, students not getting their 30 a week and so on, has gone. I do not know if he has gone with a huge pay-off, I suspect he has not because there were two significant cock-ups involving the Learning and Skills Council and I would be astonished if he walked away with a million.

Mr Farrugia: So would I.

Q67 Mr Prentice: Good.

Mr Farrugia: But it could happen.

Mr Prentice: The other thing I would say to Ian is that the Government is acting on this.

Q68 Mr Liddell-Grainger: They are going to full disclosure, which is not before time, but at the end of the day, and this is why I came back to you on the banding, now we have an opportunity to do it because we know exactly what they are getting paid, their bonuses, et cetera. Quangos are just getting out of control, they are everywhere, they pervade our lives, they are running parts of district councils, doing all sorts of things such as the Foundation for Swimming Pools. Surely we must be able to sort this out in this way, that you know if you go in there this is roughly what you are going to get instead of having a free-for-all. You talked about the star system, only nine people on a four star council. That has got to be a better way, has it not?

Mr Clark: I think what you describe is something quite different. I think it is fiendishly difficult for a local person to work out who is running what, but that has been a construct of many years of different legislation which has set up elaborate networks, partnerships, boards and other issues. Obviously I was not quite a councillor when the London County Council ran health in London, but if you look at the way local tax-paid-for services have been splintered into a whole range of agencies, the transparency of trying to get that sorted for an individual is very difficult. Even in a wonderfully run city like York, if you were to ask a citizen, "Who is responsible for this? Is it me as the chief executive or another agency?" it is very difficult to know. I do have to say I think the proliferation of tax-paid-for bodies would probably have been much better served had democratically elected councils taken on some of those duties and set up just another stand-alone agency.

Ms Toynbee: I think it has been a consequence of 30 years of governments not wanting to be seen to grow the state and yet the state has taken on more functions so it outsources everything, it creates quangos. It outsources things either to private companies or to quangos so that it can claim it has kept the state itself at the centre within a reasonable number of people. Very often they will say, "We have cut X number of civil servants" when actually they have put them somewhere else, or they have put the function somewhere else. It is part of the "shrink the state" ideology that has created something that in the end really is not accountable in the way that it ought to be.

Mr Liddell-Grainger: Is not David's argument that 50 years ago the burghers of York would have run everything, top to bottom, they would have run the lot, but now there are so many quangos, foundations, trusts, every other thing which has grown out of this sort of government centralisation, as you have rightly said, that is where we have gone wrong? Do we need to go back to saying we will give elected councils, such as York, the power to just get on with it and run it top to bottom, instead of going to unitaries and all this, just run the thing as local burghers?

Chairman: I do not want to get away from our mainstream business. These are all interesting questions but they do take us into territory which is not ultimately ours, if you do not mind me saying so.

Q69 Mr Liddell-Grainger: I was just trying to get the pay structures and pay scales.

Mr Travers: Everything other than local government is to some degree national government. If they are appointed bodies, non-departmental public bodies of various kinds, they all have their route back into a minister in the Government and it seems to me that the Government could do that for its own quangos if it wanted to now, but they do not. I think that is because, in a sense, it has been seen that different quangos have different functions and are different from place to place; a big health authority chief in one place is different from the same job somewhere else. Why do I feel national banding and a national equivalent banding quango to do it all might make it worse even than it is, because there would have to be a quango to do it remember.

Q70 Chairman: Something like the Senior Salaries Review Body, which obviously governs a range of public service pay, you do not think any idea of extending or inventing a body that would seek to do that over a wider canvas would make any sense?

Mr Travers: I think the Senior Salaries Review Body in the work that it does to try to unravel, as I understand it, what comparable pay is in other parts of the public sector or for equivalent jobs sometimes overseas when a new job is invented within the public sector, there may be some benefit in pushing that information out and having a debate about it. I am not sure it would always answer the question what this particular chief officer or senior officer should be paid, because we have tended to think only of the top officers but, of course, for every one of them there are several beneath, and trying to set all their pay centrally does sound like a complicated quango all of itself.

Q71 Mr Prentice: On this point, the top paid person in the public sector is the Chief Executive of Network Rail and, according to the Taxpayers' Alliance list, he gets 1,244,000 a year. When I asked ministers in the Department for Transport whether they are consulted in any way, shape or form on the salary and bonuses of board members in Network Rail I was told it was not a matter for them, not a matter for the Government, it is a matter for the company's independent remuneration committee. Is not the question this: who sits on these remuneration committees, not just for Network Rail but for Royal Mail, Channel 4, Nuclear Fuels, the Financial Services Authority and so on and so forth? If the Government really wanted to influence salaries and bonuses they could suggest people like Ben Farrugia to sit on the remuneration committees of these public bodies.

Mr Travers: Without going down the complicated route of Network Rail, I think as a not-for-dividend company it is something really complicated. All the systems you have described are ones that the Government has to some degree assented to. Even if they say, "It's not for us, it's for this body to make these decisions", the systems are all ones that Government has created. Network Rail is particularly so, a fascinating construct. I do not think that the Government can get out from under saying that at some level it is responsible if not for the precise pay level then certainly for the arrangements that lie behind the way the decision is made. Of course, it would be possible for another government to say, "We will set all these salaries nationally". You will know better than me the history of the Morrisonian public corporation and the effort to distance these decisions from Government. That leads us to a debate about whether or not Government should directly run these things or whether they should be done at arm's length, which is a separate debate again.

Q72 Chairman: Gordon's question was the broader question of who does the setting. The one sure fact in this discussion is that these top public sector salaries have gone up considerably in recent years. That is the one sure fact, so the question who is doing the setting that is producing that consequence is worth exploring. Who sits on these remuneration bodies in these different organisations?

Mr Farrugia: Board members.

Q73 Chairman: Should somebody else sit on them who brings a public interest perspective to it, as we do with appointments to quangos now, we have independent people who sit in on the appointments so you cannot have crude patronage? Why could you not have independent appointees who sit on the remuneration committees for all these public bodies?

Mr Farrugia: I think it is a very good point. I am not looking for a job on the independent remuneration panel of the Royal Mail or anything. They are vested interests by and large. I have looked at them closely and by and large they are board members who are then appointed to sit on the remuneration panel voting their and their chief executive's pay, which does not make any sense at all. Often there are non-executive board members as well, but increasingly they are getting paid as well now, and handsomely. I completely agree that there is a significant problem and that is a problem that could be addressed, maybe not with law but, as Tony says, by ministerial action to say, "You must put more independent people on these boards".

Ms Toynbee: They are doing this because they have been told to mimic the private sector and make themselves look as convincingly like an ordinary private company as possible, so they do exactly what private companies do, though slightly less so.

Mr Farrugia: That is possibly very true, but no reason to do it. Maybe that is a reason not to do it.

Q74 Chairman: David, how would that work in local government because it is sort of in-house, is it not?

Mr Clark: It is completely in-house. In local government we do not have these sorts of committees, except for elected members where certainly in most cases there are independent people now who chair committees that set the earnings of elected members. By and large the wages paid for chief executives have not gone up massively actually. There are a few at the top that people often talk about, but the average district is still earning less than 100,000 as a chief exec. For me, every time I have been involved in anything to do with this it is councillors and it is usually all-party saying, "This is what we want", they seek advice, and you can seek advice from my organisation but equally from Hay and various other people, about what the market is and you can decide how to go. There is one north-east authority which wanted to go for a chief exec but they were advised they would be going at exactly the same time as all the new unitaries so they simply put in an interim for a while, went later and actually paid less because the councillors had thought it through and did their job properly because they were not going to go out when everybody else was going out which would have an inflationary effect. My view is that the democratically elected member is actually best-placed to do it and by and large seems to do a good job.

Q75 Kelvin Hopkins: If I can go back to when Tony was talking about what happens in the private sector when things go wrong - bankruptcy - and what happens in the public sector when a manager gets things wrong. If I can contrast perhaps Sir Fred Goodwin, bankrupt banker, who should be down at the Jobcentre getting his Jobseeker's Allowance, but is actually on 700,000 a year for a monumental failure that has cost the taxpayer many billions. That is the price of failure in the private sector. In the public sector, almost at the same time, we had the woman who was Head of Children's Services of Haringey, at the time of the Baby P scandal. She has been humiliated, her career is in tatters, her reputation has gone and she is not getting 700,000 a year. I am not saying she should but, on the other hand, there is a contrast. I somehow think life is now less painful for Sir Fred Goodwin with his billions of pounds cost the taxpayer than it is for the Head of Children's Services at Haringey. Indeed, that is the pattern, is it not, in the private sector, that people do not suffer in fact?

Mr Farrugia: I actually think that you could find examples in both. Off the top of my head I have a few examples of public sector executives who have left an organisation for gross incompetence almost and then walked into another even better paid job, and then again, and then again, and then again, and their career goes from strength to strength almost on the grounds of being fired for being incompetent, which does not make any sense, they are not humiliated and they are getting paid very handsomely for it.

Q76 Kelvin Hopkins: Is this not precisely what Polly said, that in some areas the public sector is trying to ape the private sector? We have seen a hospital chief executive who was sacked some years ago but finished up with a higher paid job in another hospital.

Mr Farrugia: Absolutely. I think they are apeing the private sector.

Q77 Kelvin Hopkins: So they are apeing the private sector, because that is what happens, you look after your mates.

Mr Clark: I think your phrase was "fired for nearly gross incompetence". I think gross incompetence is actually like pregnancy, you either are or you are not, you cannot be nearly. Let us just look at some of the people who have been fired before we get carried away. In a number of cases they have been fired for pure politics. Let us go back to Lincolnshire pre-Tony McArdle when Mr Speechley was the leader and forced out a chief executive who then got a huge pay-off, and why was he forced out, he was forced out because he was the one who called in the police who eventually put Mr Speechley in jail. He then returned to the chamber with a tag! In those circumstances the chief exec got a big pay-off for being sacked for doing the job, so it may be that somebody is nearly grossly incompetent but in a lot of cases they get the push for doing the things that you would want them to do.

Q78 Kelvin Hopkins: There was another example of precisely that in London some years ago where exposing corruption cost a public servant his reputation, job and everything. I want to go on to a broader point relating to this. Gershon talked about there being a fourth dimension in public sector employment to the three-dimensional role of the private sector. I would have said one dimension, perhaps you are just making a profit, but in the public sector there is also often a legal duty, a duty of care, a public service ethos which involves caring about what actually happens to the people you govern, children in care and so on. People die because of lack of care. In the private sector it is primarily about profit and, therefore, you do not have that dimension. I think there is a difference in that the private sector is paid much more than the public sector. Is it not changing the nature of the public sector and diminishing those important values by making them behave more and more like the private sector?

Ms Toynbee: I think that the role of the public sector in setting moral standards is very important because if we add up the 387 people who earn over 150,000 it is peanuts in terms of total spending by the state, we are talking about very small sums of money overall. If you were to set a benchmark with nobody earning more than X you would not save all that much money. The reason it seems to be worrying you is not so much the actual pennies saved but the message that it sends and the ethos, as you say. It seems to me that in the course of your inquiry you need to slightly widen it and say why do pay differentials matter, what is out of control, why does it matter when things get so far from top to bottom. I would like to suggest that perhaps you call Richard Wilkinson, author of a book that is just out called The Spirit Level, who has done terrific research across the world about the countries that are most equal in terms of their earnings and their outcomes in terms of the economy, happiness, successful societies. He is an epidemiologist. It is very, very convincing evidence. It shows that countries that really do not allow the disparities to get out of hand and have very good public services are better through and through. It seems to me that there is something in the core of that that you are reaching for here that is not just about efficiency of the public sector but the message the public sector sends out.

Q79 Kelvin Hopkins: Within the last week I have spoken to a number of people in the health sector - I will not go into detail - and clearly some of the very senior people regard their good managers as the ones who have a good financial performance, not the ones who are actually concerned about the care of their patients. Sometimes that is exposed, like Stafford Hospital, but by and large the pressure is on financial performance of Primary Care Trusts and hospital trusts and that is how they are judged. As you say, Polly, is this not diminishing our public service and making it poorer?

Ms Toynbee: Yes.

Mr Clark: It is also an inevitable consequence of policy, is it not? If you take the local government context, you had Terminator 1, which was the Thatcher years which were essentially political, seeing local government as a political enemy and doing something about it, the building over the water, but in the current climate of Mr Blair and Mr Brown what you have actually got is Terminator 2, the rise of the management consultant, where there is a belief that business techniques and management consultancies can actually make everything better. In one or two cases it can but, you are right, this idea that you can measure everything and everybody's financial performance and that produces the best home help to go out and visit my dad is actually just plain daft.

Q80 Chairman: If we can now talk in shorthand because we have been going for a long time and I have got to bring it to a conclusion. Surely we accept the idea that someone who genuinely makes an organisation better should probably be paid more than someone who does not, and certainly more than someone who lets the organisation get worse?

Mr Clark: Yes.

Q81 Chairman: Is not one of the problems at the moment that that does not seem to happen? We can point to organisations which are not good where people get paid a lot of money, even go downhill and get paid a lot of money. There is no clear link between actually what people are doing in organisations and the amount of remuneration they are getting. Is that not a real issue for us?

Mr Travers: You are right, of course, but you can see the world you open up by adopting the idea that people who are really good get more and those who are not so good get less creates the very world in which the top will indeed escalate. I am not disagreeing with you, you can see there is a choice between a sort of flat rate for all, a banding system or something, which would be fair at some level and would allow public service ethos people to deliver good services because they want to do it and they are not doing it all for the money, but if you get into a world of rewarding the good and penalising the bad you will create a range which will have a top and we are back to where we started.

Q82 Chairman: If you say to someone, "You're coming here, we're a no-star organisation, you make this a four star organisation and we'll give you more money", that is reasonable, is it not?

Ms Toynbee: The academic evidence on performance-related pay is that it really is a chimera, it becomes very quickly box-ticking and hitting certain targets and does not produce better overall results. There is no academic evidence that it does, and yet it has been adopted almost wholesale by the Government, by management consultants, people who have just assumed that performance-related pay must produce performance. There is not any academic evidence to back that up.

Q83 Mr Prentice: In your Spirit Level example, the people running complex organisations in, let us say, Finland or Sweden would be trying as hard as people in this country to make sure the organisations they were running were successful presumably.

Ms Toynbee: I think the point is when people want to run the top of an organisation, whether it is a big hospital, a big local authority or a big company, they are people who are terrifically driven anyway to be the top and to be the best and that driving force of staying top dog in your organisation, public or private, is really what motivates people much more than the money; the money is often a question of the Silverback saying who has got the most beans. The money itself is not as important as the relative status of what you do, it is only one indicator of status, and one should not imagine that money is the only indicator of status.

Q84 Mr Walker: Just on that point on performance-related pay. I am not an expert on performance-related pay but somebody who came in on a zero star council and turned it into a four star council would increase their market value, so if that council wanted to retain that person they would have to match what his or her market value was on the open market. You do not necessarily have to have performance-related pay for someone to advance their earning potential. That is more of a statement than a question.

Ms Toynbee: Would you want them then to be poached by somebody else, another council that would push their pay up more, and when they had been there for a while another council would poach them?

Q85 Mr Walker: You would have to take that decision.

Ms Toynbee: That would be an escalator.

Q86 Mr Walker: You would have to make the commercial decision as the council, "Do we want to keep this person because it's work in progress or have they now achieved the improvement we're looking for so we can have more of a managerial type person at the top and this person can go on?"

Ms Toynbee: You will not know that person as being the one who has been most responsible for it, there will be a whole range of people and reasons why certain public organisations rise and fall. It is not always either the praise or blame of the guy at the top.

Mr Walker: You and I both know, and I think we agreed, that in certain secondary schools the quality of the headteacher makes all the difference, and that is something we have woken up to rather late in the day.

Q87 Julie Morgan: I was surprised, David, when you said that chief executives' pay had not actually gone up that much. Could you expand on that? I have got the example of Cardiff, where I am one of four MPs there.

Mr Clark: I know you are, and a former councillor.

Q88 Julie Morgan: Obviously the Cardiff Council Chief Executive's pay has gone up quite a lot, I think about 30,000 over two years. Cardiff is the sort of city that is very diverse and it needs somebody good at the top, so I am not criticising him in any way, but what comments have you got on that?

Mr Clark: By and large district councils have not felt this pull, although there are some that have. Unitary cities such as your own have seen a greater increase but, in fact, the average wages of chief executives in Wales still lag behind the English ones quite considerably. I suspect what is happening in a number of places, particularly a capital city such as that, is that somebody has taken a view that they do want to retain, in this instance it is Byron Davies, is it not? If you look at the pay settlement, which is what I am indicating, of two% and two and a half% last year, the amounts going up have not been as great for chief executives. What has happened though is in a number of fairly high profile places councils have decided to do what Charles Walker described and have said, "We think we're in a hole. We want somebody and we're going to try and buy the best" and that has forced up a percentage. We reckon somewhere in the order of 20% of posts have had quite large increases in the last two or three years and in others not so much. It is slightly complicated, of course, because if you went to Cornwall, Cornwall has high wage inflation for its county but it is now a unitary county and its six other chief executives are no longer in post because those districts have been abolished. When you start unpacking all those sorts of things, overall it has not gone up that much.

Q89 Mr Burrowes: Where is the trigger for this public scrutiny and determination of pay levels? Is it taxpayers' money? Should there be a threshold of how much public money is going into an organisation? Do you then involve universities and other charities, indeed banks now and PFI-led companies? How far do you spread the net?

Mr Farrugia: Network Rail is a good example of what Tony mentioned of these very grey area bodies where we underwrite all the debt for it but, for instance, there is almost no Government oversight of Network Rail.

Q90 Mr Burrowes: You criticise it but what would you specifically recommend? You can publish a report about the pay, but in terms of solutions where would you say this should trigger off a particular mechanism or we really should know how to scrutinise it?

Mr Farrugia: I certainly feel that in terms of Network Rail's failures, and everyone says consistently every year they have some quite public failures in terms of engineering and so on, people would feel the chief executive and the executives should maybe carry the can for some of that, although admittedly it is probably not their personal responsibility.

Mr Burrowes: There may be some successful ones as well.

Q91 Kelvin Hopkins: It now costs five times more to lay a mile of railway track under Network Rail than it did under BR, four times more to do maintenance, the quality of work is less and the senior staff are paid much more. Should you not be much more worried about that than you are about chasing chief executives who have got the responsibility of children's services, education or whatever?

Mr Farrugia: Can we not chase them all? Can we not focus on them all?

Q92 Kelvin Hopkins: I am in favour of chasing them, but let us look at where public cost is: the banks, Network Rail.

Mr Farrugia: Absolutely.

Q93 Mr Burrowes: What is the trigger? We have looked at failure but let us look at success.

Ms Toynbee: What we suggest quite modestly in our book is that the Low Pay Commission should become the Pay Commission and it should suggest guidelines and benchmarks. Nothing to be enforced, because you can start that way by saying, "We think for this sector or that sector a reasonable disparity between the top and bottom should be in this range". Then it gives people, whether they are people investigating the public sector or whether they are shareholders in the private sector, something to get hold of and say, "Look, you've exceeded the recommendation by this much, you must give us a reason why there is something very special in your case". I think you could begin with something advisory like that that allows those who have to hold people to account, whether shareholders or councillors or whoever it might be, to say, "This is what comparability should be, not what the head-hunters say".

Q94 Chairman: This would cover both the private and public sectors?

Ms Toynbee: Yes, I think so.

Q95 Chairman: Tony, would that be acceptable or would it lead you into the problems that you were describing earlier on?

Mr Travers: To answer the question directly, and this is not to imply it was not a good answer, if we are looking for a post-modern way of trying to work out what is in the public sector and what is in the private sector, to answer the question does this organisation have its roots in an Act of Parliament might give you a clue as to where one ended and the other began, for want of any better way of doing it. I think the idea of flexibility is a good one in how any such agency of the kind that Polly has outlined or any other approached what was in the public sector and the private sector because it will not change, but there are private companies these days that have their roots in an Act of Parliament, whereas Tesco clearly does not.

Q96 Chairman: I think the banks probably do.

Mr Travers: They would have changed status latterly, would they not, Chairman?

Q97 Mr Prentice: Polly, I have been very diligent in reading your book, I have to say, because you tell us on page 52, "A High Pay Commission might curb excesses if it were to set benchmarks for top pay". If I were Sir Philip Green or one of these private equity people I would say, "Polly Toynbee, dream on". Philip Green paid himself 1.3 billion, handed the money over to his wife who lives in Monaco so he could not pay taxes, and he was knighted!

Ms Toynbee: You in Parliament can do something about that.

Q98 Mr Prentice: It just sounds a bit hinky, the High Pay Commission, because this is advisory and I keep telling people we live in a big, nasty capitalist world where the people who make the real big money are just going to laugh.

Ms Toynbee: I hope you are going to be doing something about Monaco anyway and HMRC is now going to be more vigorous about pursuing people.

Chairman: And we are taking honours away, so we are on the case for you.

Mr Walker: I do not agree with that, except in Fred the Shred's case.

Q99 Chairman: It is pretty clear, is it not, that those people who are directly, as it were, comparable with the private sector have to be treated in a rather different way from people who are not. If you are a finance director or an IT director, of even if you are the Director-General of the BBC and you are existing in an environment where you instantly are comparable and can change your skills readily with a major private sector player, is not the market there different from markets in other bits of the public sector?

Ms Toynbee: I think the BBC have got it wrong, they misperceive things. There are a lot of excellent people who would like to be Director-General of the BBC and, therefore, to have to compare themselves with a now collapsed market in television has been a big blunder in terms of the respect that the BBC is held in and it is regrettable.

Q100 Chairman: Presumably things like IT directors, finance directors, are interchangeable between public and private sectors, are they not, and you have to pay the rate for the job?

Mr Farrugia: Are they? Are they genuinely interchangeable? A lot of them will be.

Mr Clark: You are certainly getting finance directors in IT. If you were a London borough at the moment you would be rather pleased with the recession because you get an awful lot of people who used to work in financial services applying for those sorts of jobs. When Canary Wharf does very well a lot of people leave local government. Yes, you do see that.

Mr Farrugia: Is the job directly comparable? Your funding is going to be the same, the risks to your own position are smaller. Surely all these things must play into consideration as well.

Q101 Chairman: I think it is probably a more complex equation than you suggest. Is there anything you would like to say to us in terms of what we might do? You have said many things to us already but is there anything else you might want to say to us that you have not had a chance to say before we end?

Mr Travers: Very briefly, and Polly referred to this, the issue of public sector pay is tangled with other things that you will not want to enquire into this time, such as the honours system, such as public sector pensions, so it cannot be viewed entirely freestanding of these separate issues. Indeed, in a recession the comparison between what is going on in the private sector and the public sector and perceptions of that, that is obvious. The honours system and pensions are both linked in with the question of basic pay.

Chairman: A good reminder. We wanted a session that would get the juices of the Committee going and it has absolutely done that, it could not have been better. We are extremely grateful to you for all of that and we shall feed off what you have been telling us as we do further inquiries into this area. We now have to go and talk about our own expenses! Thank you very much indeed.