CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 304-iiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREPUBLIC ADMINISTRATION COMMITTEE
EXECUTIVE PAY IN THE PUBLIC SECTOR
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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
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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
Members present
Dr Tony Wright, in the Chair
Paul Flynn
David Heyes
Kelvin
Julie Morgan
Mr Gordon Prentice
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Examination of Witnesses
Witnesses: Mr Peter Boreham, Head of UK Executive Remuneration, Hay Group, Mr David Evans, Head of Pay and Labour Market Services, Capita Survey and Research Unit, Mr Christopher Johnson, UK Human Capital Leader, Mercer (formerly of the Cabinet Office), and Mr Hamish Davidson, recruitment consultant, gave evidence.
Q102 Chairman: We are very delighted to welcome this morning Peter Boreham, who is Head of UK Executive Remuneration at the Hay Group, Hamish Davidson, who is a recruitment consultant of long pedigree, David Evans, Head of the Pay and Labour Market Services, Capital Survey and Research Unit, and Christopher Johnson, UK Human Capital Leader at Mercer. The reason we have assembled you together is because you know everything there is to know about executive pay in both the public and private sector. As you know, we have asked you here because we are looking at the issue of top pay in the public sector and, because you know all about it, as you are in the business of finding people for appointments and advising on pay levels, we thought you were good people to bring in. Could I start with a couple of questions to kick us off? Do you think there is an issue here? We have started doing this because it has been said that there is an issue about what is happening to top pay in the public sector. Are we right to think that there is an issue there that needs investigating or not?
Mr Johnson: The straight answer is, yes, there is an issue, and the issue for me has got two parts to it. The first part of it is that it seems, in terms of the public and political debate about executive pay in the public sector, there is not a consensus about what it should look like, so there is a lot of pressure claiming that public servants are paid too much, and yet you can argue, which is my second point, that there is insufficient money for executive pay for the public sector to recruit and retain the talent it needs to deliver on what I would argue is actually a very challenging task, which is in a period of pressure on public expenditure, pressure to deliver high quality services to citizens and to satisfy the taxpayer about value for money, good leadership and management is going to be crucial. In summary, I think there is insufficient consensus publicly and politically about the nature of public pay in the public sector and, secondly, I think there is a real challenge that public sector organisations are facing, which is securing and retaining the calibre of talent they need to deliver on the expectations that are being placed upon them.
Q103 Chairman: Thank you for that, but I am not sure from that whether you are telling us, because of this need to go out and get the very best talent in this market place, we should be paying people more. Is that the conclusion?
Mr Johnson: There is an interesting conundrum here. It is possible to get really good people to join the public sector. The Civil Service, which is one part of the public sector that tends to be more open at senior levels, has done very well securing talent coming in and much of the time the private sector has been willing to look at the opportunity in the round, quite often taking a significant reduction in earnings, but seeing a very attractive role at the heart of doing something important for the country and balancing those things together and saying, "Yes, I would like to come and play a part." So there are people that it is possible to recruit, but two challenges flow from the back of it. One is that I do not think I can see consistently the ability of the public sector to attract great talent, and, secondly the pay levels that you need to put on the table to attract people in are higher than the pay levels of the people that are already in the public sector and there is a very significant internal relativity pressure which is, I think, becoming quite a serious problem.
Q104 Chairman: Is it possible to say, in general terms, whether top pay in the public sector is too high or too low?
Mr Johnson: I think it is, in general terms, too low, because in general terms we are not able to secure the talent into the public sector.
Q105 Chairman: That is a novel contribution to our deliberations. Can I hear from the others on that?
Mr Boreham: I think from our perspective at Hay Group, we are concerned at the way that pay has grown quite rapidly at the top roles in the public sector, not because the growth itself is wrong, because I think we share some of Chris's points about attracting top talent, but the growth has all been in the form of fixed guaranteed remuneration. I think we would be happier if a greater proportion of remuneration was linked to the value that those organisations were delivering to their users and to the broader public.
Q106 Chairman: We will come back to that, I am sure. Hamish, do you want to come in?
Mr Davidson: I would agree exactly with that point. Right across the piece, to be honest, I think you have to take note that there are really three categories of post that we might be talking about here. Certainly in terms of the ones you were looking at yourselves, there will be the non-executive chair type roles, there will be roles for agencies and bodies that are dealing fundamentally with organisations in the private sector, for example the FSA, where you need to compete for a particular kind of candidate, and then the rest, and I think the rest of those posts, in terms of how the salaries are moving, have been fundamentally influenced in recent years by the movement on pay and inflation in local government.
Mr Evans: I think there are differences across the public sector. I think there is a danger in looking at the public sector as a whole. I tend to cover the NHS. I think if we looked at different parts of the public sector, we would find different pay levels. I think there is also the issue of who you compare yourselves to in terms of the private sector in establishing some of the proper benchmarks.
Q107 Chairman: There is work to do to explore as well whether we ought to try and get some more coherence into the public sector, or at least coherent principles into the public sector, but we will come to that later. Can I ask one further question before I hand over to colleagues? You are a collection of, I think you call yourselves, recruitment consultants. You do not. Perhaps you would tell us what you call yourselves.
Mr Boreham: We have one recruitment consultant.
Q108 Chairman: I thought we had the head-hunters and the recruitment consultants, or remuneration consultants. Is that right?
Mr Boreham: The three of us are involved in advising remuneration committees and organisations on how to pay their people.
Q109 Chairman: Perhaps you would just tell us what you actually do?
Mr Boreham: Let us imagine we are doing a project for a foundation trust hospital. The remuneration committee of the board would approach us and would ask us to help it. We would help that remuneration committee to develop their pay strategy: where in the market is it pitching its pay, who is it comparing itself to, where does it want to be positioned? We will then produce some market data looking at how they are doing against that strategy, make recommendations about salaries, whether or not they should be looking for variable compensation and, if so, how would that be designed. That would be a fairly typical project for us.
Mr Evans: We undertake a salary survey
of NHS trusts in
Mr Johnson: I think the point I would add to those two observations is that an important area of support that public sector organisations need is understanding the right mixture of things to do and that they are put together in one package. So it is not just about pay, it is about the structure of the contract and the reward arrangements of the individual, and there are many things that are attractive about working in the public sector that are not about pay. For example, if you were a senior commercial person, say, in a big organisation like BP or Shell, you could be interested in coming into the public sector because the scale in which you are operating in a commercial role is much more significant than might be the case out in the private sector. So helping organisations to understand how to balance these different factors together and to structure a reward proposition, I think, is a very important piece of advice and then informing it about what goes on competitively and what does that imply about the level of pay, I think, is then a second part of the support that public sector organisations need.
Q110 Chairman: So we understand the area, how much would you get paid for helping with a typical appointment of the kind you are talking about?
Mr Boreham: For one of our clients the fees would vary enormously, but if we were talking about a very simple piece of benchmarking, that would be a few thousand pounds. If you were talking about a very substantial top to bottom review of strategy, design of incentives, and so on, that might head towards £100,000.
Q111 Chairman: I am asking innocent questions. I cannot quite understand why these organisations do not know themselves well enough to be able to run appointment systems. I do not know why they have got to add several thousand pounds to every appointment to get people like you involved. You tell me.
Mr Evans: It is not only appointments, it is when they are reviewing their annual increase, effectively.
Mr Boreham: It is a question of expertise. The reality is in the public sector the level of reward expertise within most organisations is limited compared to the private sector, partly because the private sector has exciting toys to play with like incentive programmes and company car schemes, share schemes, and all those things. Typically, the level of reward expertise in the public sector is limited, so they are buying expertise. They are also buying independence and they are buying a broader perspective, because the reality is we work with quite a lot of organisations, so we bring a perspective across the sector, across several sectors, which will allow them to make better decisions.
Q112 Mr Prentice: Why do we not have a review body for foundation trusts? What do you do that a review body could not do in recommending salary increases for the top people in NHS foundation trusts?
Mr Boreham: NHS foundation trusts have devolved responsibilities. Therefore, they have devolved responsibility for remuneration.
Q113 Mr Prentice: I understand all that, but we have got senior salary review bodies for the military, for the judiciary, for MPs, but we do not have one for NHS foundation trusts?
Mr Boreham: The judiciary and MPs are centralised, whereas foundation trusts have devolved commercial freedoms. Therefore, their boards are responsible for determining pay and, therefore, they need pay advice that is particular to that organisation, whereas the judiciary are appointed centrally: they are on centrally controlled contracts.
Mr Evans: The Senior Salaries Review Body does cover NHS very senior managers who are employed by strategic health authorities, primary care trusts and ambulance trusts.
Q114 Mr Prentice: I understand that, but not NHS foundations trusts. So you have got two different ways of determining the pay of very top people in the NHS.
Mr Evans: Yes, and that has created tremendous problems, because trusts and foundation trusts have got the freedom to set salaries, whereas the other bodies that are covered by the very senior managers framework are constrained, and that has caused some tensions, because PCTs and strategic health authorities feel that they cannot recruit and retain because salaries are moving faster, because people like foundation trusts have increased them at a higher rate. So there is tension within the NHS.
Q115 Mr Prentice: Do you think all parts of the NHS should be treated in the way that NHS foundation trusts are treated: that they should all determine their own pay?
Mr Evans: Government policy is that we are moving to a situation where there will be more foundation trusts where more organisations have got the opportunity to apply for foundation trust status.
Q116 Mr Prentice: Is a fragmented and atomised NHS where every part of NHS family, if I can put it that way, can determine their own pay to get the best people something that you would advocate?
Mr Evans: Yes, I think I probably would, within some sort of framework, within some sorts of constraints, and they are subject to monitoring by people like Monitor, who monitor their performance, and how they set their remuneration, again, is subject to public scrutiny.
Q117 Mr Prentice: Hamish, you do something slightly different, do you not? Could you add your bit to this?
Mr Davidson: We probably come in at a later stage, in the sense that an organisation decides there is a vacancy, or a vacancy looming, and my job is to: go along and help them articulate what the job and the person specification is; and then to work out a strategy of how we might attract candidates; to then potentially go and find those candidates through a combination of advertising and, possibly, head-hunting; to perhaps assess those candidates at initial interviews, et cetera; take soundings on them; to go back to the client with all the materials, for the client to agree on the particular shortlist to see; and then to assist the client make an appointment. I take them through that entire process.
Q118 Mr Prentice: A mischievous person could say that these organisations, first of all, spend several thousand pounds identifying the pay level they are going to be working at, and then they have got to pay several further thousand pounds to employ someone to go out and recruit somebody.
Mr Davidson: They may well do. Some of these organisations, of course, recruit themselves. Certainly in central government posts I would have thought at least over half of the posts are undertaken themselves. The reason for the increased use of head-hunters over the years and moving to somewhat more of a private sector system of recruitment is fundamentally: 1) If you have tried and failed to appoint, then maybe you have to go back to the market again, and you think, "We will need some assistance generally with candidates." 2) There has been a thinning of HR capacity to actually help on the recruitment process as bureaucracy has been cut back and resources pushed to the front line. 3) The increased complexity of the roles, particularly at chief executive level, means that the kind of skills you are looking for are in very short supply and, therefore, it is a narrow pool, and some of these people are not so prone to apply of their own volition. 4) There may be the perception generally from clients that there are very few people who could do the job and, therefore, they will need to be teased out. 5) There has been an increasing desire to bring in some kind of independent assessment to assist those undertaking the appointments. 6) There may be a desire to test the market anyway, to test internal candidates against what is available externally. 7) There has been an increased 'mortality' rate, particularly of chief executives, particularly in the NHS and local government, if they are perceived to have failed and the organisation is not delivering; and 8) also, of course, to address the diversity issues, where there has been a particular desire to bring in a greater range of candidates than the typical male, stale and pale that you have had before. For all these reasons, I think you have seen an increasing tendency on occasions to utilise the services of recruitment consultants.
Q119 Mr Prentice: But when you have said all that, if you are looking for an instant way to reduce the public sector pay bill, you could remove yourselves from the picture and that would produce an instant huge saving, would it not?
Mr Davidson: It might do, but, of course, one of the interesting tendencies in recent years is that candidates have become more and more reluctant to apply of their own volition for posts, unless they think that there is strong likelihood that they are going to be a candidate and, indeed, possibly get appointed. There has been a change in behaviour from, say, 20 years ago when I was first doing this kind of work in the public sector, a dramatic change in behaviour, for a whole variety of reasons.
Mr Boreham: I think there is also a danger that, if organisations review their own pay policy without external independent advice, they may come to some spurious conclusions. I will give you an example. We are a local authority. Our turnover is half a billion pounds. If we look at the listed company market, that would put us into the FTSE mid 250. A FTSE mid 250 chief executive would be paid a salary of half a million, plus bonus. Let us set our salary policy at half a million. It sounds superficially reasonable, any of us could tear that to shreds as a policy, but I think you need an external perspective to do that, otherwise you end up either with misinformed decisions or, indeed, the executives themselves pushing for something and the non-executive directors not having enough confidence to push back.
Chairman: There is a further charge against the effect of your work, which Kelvin is going to talk to you about.
Q120 Kelvin Hopkins: I am deeply sceptical about all of this, may I say. If I was being very cynical, I would say you are all part of a little club levering up a small group of people's salaries and taking a big cut yourselves, because that is what you do. Maybe this is unfair, but Polly Toynbee says head-hunters have deliberately inflated pay, poaching top players from a tiny pool of people and using this very small market to lever up the price. I find her argument quite persuasive.
Mr Davidson: I read Polly's statements
with interest, and she is, of course, slightly skewing the real perspective
here. If I can explain this in terms of
what the real reason for salary inflation actually is, particularly looking at
local government. I am aware that this
is taking events out of scope here, but it has a knock on effect to the posts
that you are considering. Question: why
has there been salary inflation at all?
I have made the point already that a lot of these jobs have become much
more complicated, so it is perceived that fewer people can do the jobs. The second point is that, compared with 20
years ago, central government now rates highly the best of talent in local
government. Twenty years ago they did
not. If I had gone to do a senior level
recruitment exercise for the Civil Service and suggested we head-hunted within
the local government community, I would have been laughed out of court. Today local government is considered one of
the few areas of public service where there are real, solid delivery skills,
and delivery skills are what are being looked for. The second point is the unintended
consequence of the CPA[1]
regime, which ended up causing many organisations to decide: rather than
appoint someone on the up, we will need a serving chief executive from
elsewhere who has learned their mistakes first time around and knows what to do
differently and has a minimal learning curve; and that links into a third point
that does not seem to have come up in your evidence to date, which is a
behaviour one. In the public sector
people do not tend to take a cut in status or a cut in salary; period. People do in the private sector, but
typically not here in the public sector.
If you are moving into not-for-profit, yes, but generally the public
sector will not take cuts in status, and will not take cuts in salary. Fourth, there is also an increasing tendency,
and it has not changed, to draw the present specifications very narrowly, and
therefore, again, one is dealing with an ever declining pool of candidates in
terms of how the positions are specified right at the outset. Fifth, there is also an increasing tendency,
as I have suggested, of candidates not responding to job adverts
themselves. Candidates are much more
concerned about confidentiality nowadays.
Again, 20 years ago they would have been quite open with the leader of
the council and with colleagues about the fact they were going for a job. Today they are not. They are worried about leaks, they are
worried about undermining the relationship with their leader, they are worried
about the knock-on effects of destabilising their organisation if word gets out
that they might be leaving.
Consequently, candidates are waiting to be approached and they are very
suspicious. Years ago I recruited, it
ended up being, Bob Kerslake (then CX of LB Hounslow), to the post of chief
executive at
Q121 Kelvin Hopkins: It is interesting what you say, but I am still unconvinced. If I believed there was a real correlation between higher salaries for the people you have recruited to public authorities and the performance of those public authorities, I might be convinced, but I do not think there is. Indeed, we have got some examples of people in the quasi public sector on vast salaries, each of whom, or the organisations they are organising, have performed not well. I do not want to single them out, but I could. I know a fair amount about several of them, and I am not impressed with their performance, even though some of them are paid over a million pounds a year. In the NHS some of the NHS trusts have appointed smart money-saving business types who have squeezed the services and the services have suffered as a result. Stafford Hospital might be a case, and the money they have squeezed out merely goes to pay their high salary and their bonus for squeezing the money out. It does not actually help anyone apart from themselves and, then, of course, they move on and say, "It was not my fault." I am just not convinced that this is the way forward. I may say I have been involved in many public appointments myself, I have been on interview panels, and we have made very good appointments without any advice from yourselves.
Mr Davidson: I would not deny that that is the case in most situations, but there are a number of situations, equally, where organisations decide they do want assistance or they have tried to recruit and failed. You have been fortunate in your own experience. I doubt any of us here would disagree with the thought that a very rigorous performance appraisal is required, and I doubt if any of us would disagree with the fact that failure should not be tolerated. However, one observation I would make is that it does depend on how you judge failure. I was involved, as some of you may know, in the recruitment of the Sergeant at Arms and the Secretary to the Speaker of the House of Commons, both of whom fell out with Mr Speaker and both of whom subsequently disappeared. It was not a question of their performance though, they were not perceived to have failed in their jobs, but the relationship might have done. So we have to be careful about what is perceived to be judged as failure.
Q122 Kelvin Hopkins: I think we could make the mistake of arguing from the particular to the general. There may be individual cases which I could quote as well. Nevertheless, I am still not convinced. Have you done a study relating the success of an organisation to the level of salary? There are a lot of comparators that you could use in local government and in the Health Service to do this.
Mr Boreham: I think that fits with the thesis that, I think, a number of us share. The problem is the money has all gone into salary. What we are saying is, if this person is wonderful and is equipped to run this complicated organisation, then an element of that pay should be linked to them delivering what they have promised to deliver, and if the organisation is not achieving the things it is supposed to be achieving, then their variable pay is not delivered; if it achieves more than was expected, then they receive more in variable pay, and that actually deals with the value for money question that you are addressing.
Kelvin
Q123 Chairman: Hamish, you have explained, quite well, I think, some of the reasons why we have had what you have called salary inflation. If we were worried about that, if we wanted to do something about that salary inflation, knowing all you know about the market, how would you turn it round?
Mr Davidson: Fundamentally we are here talking about the supply of candidates, and the issues I think you might like to consider in that regard would be the tendency of public sector employers to: write specifications that are far too narrow; that require candidates to, effectively, walk on water and perform miracles several times a day, which automatically means you have got a very narrow group of candidates; and the tendency often of the people creating these specifications, including many head-hunters, I might add, to be pale, male and stale, et cetera, in fact dull and boring too. I recall Sir Gus O'Donnell, before he became Cabinet Secretary, indicating that what he thought the Civil Service needed was more people with pace and passion, and I put the point to him at the time that I am one of the people required to go and deliver people with pace and passion, but do you know what happens? The departments do not appoint them because they are perceived as 'too out of the box'. So I think the panels need to be ready to take a bit more risk here. The failing with recruitment panels is the tendency to appoint to the lowest common denominator and the tendency to appoint conservatively with minimal risk, which is not something which I can understand. I also think that the recruitment processes probably needs to be less Masonic-like, particularly if you are trying to attract private sector candidates who just do not understand some of the processes and it is not explained to them effectively enough up front. In particular, the speed of a typical public sector recruitment process, which is typically much faster than it is in the private sector, and candidates, as a result, have not emotionally fully engaged to decide whether they do want the job or not. So, getting asked by the panel, "If offered the job, will you accept?", is quite a shock to the poor candidate who has just gone through their interview that day. In terms of dealing with failure issues, I would focus heavily on much more rigor in performance and appraisal, and a lot more ruthlessness, frankly, in dealing with failure altogether. For all of that, I have to say to you that there are serious problems ahead, because, for the first time in a long time, there is an entire generation of chief executives, leaders, and managers in public services who have only ever managed in growth budget situations. From 2011, we may be facing maybe ten years of radical cuts altogether, and the people are not there. Consequently, I am afraid, as much as it may pain this particular Committee here, I think you are going to see organisations ending up using head-hunters more to find those few people that have got the required skills, because most of them were pensioned off early.
Q124 Chairman: So we have got all the wrong people running these public organisations.
Mr Davidson: No, a lot of people that do not know how to manage in a downturn.
Mr Johnson: I was going to make three more process suggestions about things that could be done which could help contain inflation in public sector pay. I certainly agree with the point that Hamish has just made about the importance of managing performance, and I think the public sector has quite a lot to learn in terms of managing performance rigorously and consistently across a broad population of senior people. Secondly, I think it is very important that the public sector grows talent. The Civil Service is 500,000 people strong - that is a large organisation, by any stretch of the imagination - and ought to be able to be capable of growing a lot of its own internal talent, but that does imply very careful exposure to different experiences through a career which may be outside as well as inside the public sector. So I put a lot of weight on talent management processes. The third thing I would do is I would give more emphasis towards cash than base pay. I think this was a point that Peter was making. At the moment there is very little pay that is variable and linked to performance in the public sector, and I think if there was more pay linked to performance, with risk as well as upside, so it is not just about a bonus but it is about the real risk of money being held back as well as money given for good performance, that would help a lot in terms of inflation pressures. Then the final thing is, I subscribe to the view that there is a governance issue around this for the public sector, and in the evidence I gave you[2] I attached weight to looking at a pay review body process across the public sector more broadly than it is today. I think it is too bitty. I do think that different parts of the public sector have different needs, so there is something here about focusing on principles of reward for executives rather than specific pay increases for particular groups, I think, and I think there are governance mechanisms put in place around the use of non-executive directors and reporting, and so on; but it frustrated me when I was in the Cabinet Office that we were wanting to draw talent into the Civil Service with great delivery experience from local government, as Hamish indicated earlier, but the pay regimes in local government are different from the Civil Service and got in the way of our ability to attract people into the Civil Service. From a citizen and a taxpayer point of view, that cannot be right. From their perspective, I would have thought, there needs to be more coherence, not to the point of consistency and performance but certainly more quangos.
Chairman: Thank you for that.
Q125 Mr Prentice: Can I come in on that? I want to talk a bit about openness and transparency, which we are all concerned about. Mr Davidson, you talked about these people at the top of organisations who were worried about confidentiality. You mentioned people of calibre just waiting to be approached, and so on. What difference will the regulations make that are currently out for consultation, requiring full disclosure of the pay and perks of local authority chief executives and senior people, and, similarly, in those other areas of the public sector - NHS foundation trusts that we have already spoken about - what difference would openness and full transparency make to the market?
Mr Davidson: The short answer is none whatsoever.
Q126 Mr Prentice: I do not believe that.
Mr Davidson: None whatsoever, if you are talking about detailing remuneration. I think there is no difficulty at all. Personally, I think absolutely philosophically and generally there should be openness about what people get paid in those situations: it is public money fundamentally. The point of confidentiality I was alluding to was about applying for a job and the detail being leaked that you are applying for a job.
Q127 Mr Prentice: The Government is going to bring in these new regulations and full disclosure because the Government believes, ministers believe, it will depress this relentless increase in chief executives' salaries in local government. You are shaking your head, Mr Davidson. I wonder what the rest of you think. Does disclosure tend to depress the increase in salaries?
Mr Evans: I think local government is probably out of kilter with some other parts of the public sector such as the NHS, where there already is transparency. Even foundation trusts, in terms of their annual reports and accounts, would have a remuneration statement that would set out the basic pay, the bonus arrangements, even the pension contributions and the pension pot, effectively, of the chief executive and the executive directors. So there already is disclosure within the NHS and some other parts of the public sector. I am not sure whether that has led to depression.
Q128 Mr Prentice: You are the expert; I am not an expert. In which parts of the public sector is there not full disclosure? We know there is not full disclosure in local government; in which other parts?
Mr Boreham: It is mainly local government. That is the big obvious area where there is not disclosure, but I do not think disclosure will cause pay inflation. The reality is that pay inflation is there. To an extent, if you publish people's salaries, those who are paid lowly will point to those high salaries available elsewhere and will ask for a rise, but the evidence from both the public sector and the private sector is that decision-making is improved where there is full transparency of what the outcomes are.
Q129 Mr Prentice: It is not just salaries, it is pension entitlement, it is perks; it is the whole package.
Mr Boreham: The whole thing, yes.
Q130 Mr Prentice: Life will just continue as before once all this stuff is published. Are you trying to tell me the Taxpayers Alliance, and people like that, are not going to collate that information, bring it together, publish it, campaign on it and write to Members of Parliament?
Mr Boreham: That is my point. If the outcome of remuneration decisions is transparent, then remuneration committees who are making those decisions will have regard to how those decisions are perceived by the public, by voters, by the people who use their services. So, on the whole, I agree with you: the totality of the package is absolutely helpful.
Mr Johnson: And because it opens up accountability more clearly, it will be a cap - not a cap but it will be something that restricts wage inflation.
Mr Boreham: It is very difficult, if you are a local authority, to go out and set the highest local authority chief executive salary in the country, because that will be immediately picked up on and the remuneration committee will be asked to justify that, so you would have to have a really clear reason for doing that.
Q131 Chairman: You are saying, though, that a perverse effect would be that people would see that other people are getting more than they were getting and then want more.
Mr Boreham: There is definitely an
element of that. I am not going to
pretend to you that transparency will not cause that to happen, because we have
seen that in the private sector, but the reality is that where there is no
transparency pay levels tend to be higher.
If you look around Europe, the country in Europe that has the highest
pay arrangements is
Q132 Chairman: Do we have enough transparency for quangos?
Mr Boreham: Quangos, on the whole, make remuneration disclosures. I think they could be strengthened, I think they could quote a figure in thousands rather than a range of 5,000, which is neither here nor there really. They should be clear about perks that are available, and pensions.
Q133 Chairman: So we could have a standard disclosure regime across the public sector?
Mr Boreham: I think that would be helpful. I am not sure I would want to see the 15-page disclosure that you see in the FTSE 100 remuneration reports, but, yes, if we could come up with some baseline transparency that applied for all public funded bodies, I think everybody would be happy about that.
Q134 Mr Prentice: I have got this article in front of me by Clare Fox. She is the woman who runs the Institute of Ideas. She spends all her time thinking!
Mr Davidson: Great thoughts?
Q135 Mr Prentice: She is talking about this and she describes attacking high council salaries as merely feeding the demonisation of ambition, "The anti-fat cat rhetoric inevitably feeds the demonisation of ambition". What do you think about that thought? Does it? You have not thought about it?
Mr Johnson: No, I think it is close to nonsense actually. In terms of demonisation of ambition, I think that is nonsense. I think evidence of the degree of disclosure in the private sector would confirm that it is nonsense. What I do worry about is that there is demonisation of fat cats - and that is not the right term, obviously - demonisation of senior executives in the public sector, when actually what they are doing, and they are paid to do, is to deliver something that is very important for the country. I worry enormously about that, because I think it discourages really good people from coming into the sector, i.e. "Why should I put up with that?"
Q136 Mr Prentice: We have got something here about really good people, and I struggle with that, but Polly Toynbee, when she came before us, talked about a maximum pay commission. We have got a minimum pay commission; she was pressing for a maximum pay commission, but it would just be purely advisory. What do you think about the more general point she made about pay ratios: that if you get the chief executive of an organisation getting 100 times, 200 times more, 400 times in the case of the chief executive of Tesco, what the person on the check-out is getting, then the organisation becomes, in a sense, kind of dysfunctional?
Mr Boreham: I think there is a serious
point to be made about equality of treatment within organisations. I think the ratios test is absolute
nonsense. One of the reasons that Tesco
has a very high ratio is because Tesco is large. So the CEO at Tesco gets paid more than the
CEO of a smaller retailer, which is exactly what you would expect to
happen. You would also expect the ratio
to be much higher in an organisation that has large numbers of relatively low-skilled
workers, which would be the case in Tesco, than would be the case in an engineering-led
company, or a fund management company, or a bank. So I think the ratios test is a completely
meaningless and spurious way of assessing this.
Similarly, if you have got all your workers in
Q137 Mr Prentice: What about an organisation like the Police Service? We do not have any police officers in Poland. You would say that the same argument applies, that it would be absurd to determine the salary of the Metropolitan Police Commissioner in reference to what the police constable on the beat gets.
Mr Boreham: Yes, because I think you would have to look at the Met and say that this is a particularly large and complicated organisation compared to some other smaller forces. So you would expect the person who is running the Met to be one of the highest paid police officers in the country.
Q138 Mr Prentice: Is that the view of you all, that there is no sense in going down this road of looking at pay ratios within discrete organisations?
Mr Evans: I think it is interesting to crunch the numbers in context, but I think that is all it should be, a background context to inform the discussions. I do not think there should be any fixed rules.
Mr Boreham: You could track the ratio if it is a consistent organisation. If the organisation itself does not change, then tracking the ratio may be useful over time.
Q139 Mr Prentice: For example, the military, or something like that?
Mr Boreham: You could check how the pay
of generals moved over time compared to the pay of privates, because you are not
going to outsource your privates to
Q140 Chairman: If we had a standard disclosure arrangement, one of the things that we could disclose is that ratio of how it changes over time.
Mr Boreham: I think the ratio is fundamentally unhelpful. Polly Toynbee referred to the situation of outsourcing cleaning and catering staff. As soon as my organisation outsources its cleaning and catering staff to Chris's organisation, then my ratio gets better and his gets worse.
Q141 Mr Prentice: I remember the exchange very well. She said that in the public sector 28% of all people are professionals, in the private sector it is something like eight or nine% because the public sector has been outsourcing all the low-paid jobs to the private sector. I remember that exchange.
Mr Boreham: It does immediately distort the ratio.
Mr Johnson: I do not think it is just because the public sector has been outsourcing some types of work. I think the nature of the role of the public sector means that it needs more professionals proportionally than most private sector organisations do to finish the work.
Q142 Julie Morgan: I wanted to ask about your experience with the public sector organisations you have worked with. You come in and you are paid your thousands and you give your advice.
Mr Boreham: I am sorry; our companies are paid thousands.
Q143 Julie Morgan: I mean your companies, yes. What is your general experience? Is your advice accepted, and do you measure what the results are afterwards?
Mr Johnson: I will start. Certainly in the case of the firms I have worked with over the years, providing advice is a mixture of providing objective, dispassionate advice on the one hand and working through with the client to help the client get to a decision that takes into account the advice that we give. Yes, we are very interested in the effect of that advice, so over the years I have looked at organisations and watched them to see whether they seem to be making progress as a consequence of advice they have taken from firms I have worked with or other firms. It varies from consultancy firm to consultancy firm, but most consultancy firms do some sort of review with the client after the work has been done to take stock of whether the advice was the advice which was required and whether it had the impact that was desired.
Q144 Julie Morgan: So you do review it?
Mr Johnson: Yes.
Q145 Julie Morgan: What are the results generally?
Mr Boreham: Do clients always take our advice? No, and, indeed they should not. It would be an unfortunate situation if we were making decisions for organisations, and I am quite uncomfortable when an organisation wants me to tell them what to do, because it implies that they have not engaged with the task that they are looking for help with. So most of the time, yes, they take our advice, but they do change it, they do ignore it. Sometimes, actually, afterwards, we work out they were quite right to ignore our advice.
Q146 Chairman: You still get the fee, do you not?
Mr Boreham: Absolutely.
Q147 Julie Morgan: What about political involvement in setting pay, for example? What do you think of politicians setting the pay for the chief executives?
Mr Boreham: I think it is very difficult for politicians to set pay, because the politician will immediately look at how this will play when it is disclosed in the newspaper, and that will weigh very heavily on his or her mind, quite understandably, whereas the remuneration committee chairman of an independent organisation will be focused on the needs of that organisation in particular. I think it is difficult for all of you to set pay levels for an external organisation. At the risk of making myself very unpopular, political decisions were taken some time ago to hold down the pay of MPs and to reward in a less transparent way, and I think that is probably something that everyone now regrets. That is an example of a political decision taken to keep the headline level down. The same thing could easily happen if we were trying to have political decisions for pay, for example, of a local authority chief executive.
Mr Davidson: That last point is very prevalent here. I think that there has not been a local authority chief executive appointment, one that I was involved in, where politicians were not involved in setting the pay. The unique thing about a chief executive appointment is that for every other appointment in the authority the chief executive is the client, whereas for the chief executive appointment the politicians are the client, and they are, in my experience, very sensitised to the remuneration issues. Indeed, I think that is vital, because they will, in the end, have to defend this when it becomes public, because there will be an open salary on there. My practical experience has been that I have often given advice in terms of what I think, and sometimes that advice has been accepted and sometimes not. I explain the implications of not doing so and we move forward, but I have never had a problem with politicians having some involvement. More generally, taking the discussion away from pay for a moment, my practical experience over the years, moving right across public services, has been that often the clients do not take advice and particularly advice that has been geared towards opening up the specifications to make them less onerous. The last time I gave evidence to your committee, I made the point about: diverse teams making more informed decisions; the best of talent in any one sector being as good as the best of talent in any other sector; and talent coming in all shapes and sizes, guises, sectors, nationalities, whatever it may be. I make that point relentlessly to clients in public services. Sadly, they tend to pay lip service to this and then proceed to narrow down the specification dramatically, thereby narrowing the potential pool of candidates, and thereby, I am afraid, back to inflation in remuneration.
Q148 Julie Morgan: I think you talked earlier about the pale, male and stale appointments and a sort of world that is a bit pale, male and stale. I know the appointments you have made have not all been pale, male and stale because I think you have been responsible for some appointments where women have come in and black and minority ethnic candidates, but it does seem as if it is all from a small grouping of known people. I suppose that is my criticism really of the idea of head-hunting. You are complaining about a narrow specification, but head-hunting implies that you go to those that are known, and I think that is really something that does go down quite badly sometimes with the public and people know about how it is done?
Mr Johnson: As a client in that situation, because I have been a client, I have actually been a client to Hamish, my experience is that the client is often pressing - almost the opposite of what Hamish is saying - the recruiter to think more broadly. I can think of a number of instances where we were looking to make sure that we had tapped into potential candidates that were from minority groups and what media could we use to do that and how could we get the recruiter to focus on those parts of the market place. So I do not think it is the case that everybody takes an easy option, recruiting in their own image or recruiting from the people they know. I think there is a serious effort on both the client and the recruiter's side, in my experience, to widen the net and to make sure that we, as we then were, are picking up from a much more diverse group of candidates. I felt quite heartened actually by my own personal experience in that respect.
Mr Davidson: Chris was an enlightened client, frankly, although I have to beg to disagree to some extent here. First of all, I will accept, you will be delighted I say this, I guess, that head-hunters are often part of the problem, not part of the solution. They are part of the problem in that they themselves tend often not to challenge the client sufficiently, they tend often to take the lazy way out, because if, in fact, it turns out that we only have to look at a very small pool, it is less work. They often are themselves made up of male, stale and pale, they often are made up of people who work in that unique sector, so they are minded to think about only that sector as well. So I would be quite critical of many of my colleagues in this environment. However, I am also aware that sometimes, for statistical purposes (and the Cabinet Office were very assiduous at one point in collecting statistics in terms of analysing a break-down of shortlists and such like), yes, there is a pressure to deliver candidates who are not of the norm, but I come back to my point that often those people do not get appointed and they have a bad experience and, as a result of that, they decide, "I am not going to apply for these jobs again." This is what happens. So there is a real conundrum here in terms of delivering that diversity of candidates linked back to this point of inherent conservatism of the appointment process.
Mr Boreham: Can I make a specific point on diversity, which is to do with the recruitment of non-executive roles into public bodies, for example. Non-executive roles in the public sector are actually paid extremely low compared to the private sector; so a discount from private sector to public sector exists at executive level, but at non-executive level it is much larger. This actually causes quite a serious diversity issue, because typically you can only get people of the necessary experience if they have retired on a nice fat pension, so you tend to end up with people in their sixties or their seventies. They are not just male, pale and stale but they are certainly pale, because the reality is that there are not enough black and minority ethnic people in their sixties and seventies with deep business experience and credibility. If you want to get more black and minority ethnic non-executive directors into the public service, you have to recruit people who have got a day job, and the reality is that if they have got a day job, £290 a day is not going to do it. It also raises the question of diversity of outlook: because if all your non-executive directors are portfolio non-executives or people who have retired, you are not getting the perspective of people who are in work at the moment, who are raising families and who are more representative of the population of the UK as a whole.
Mr Davidson: I agree. There is a real dilemma there - with regard to the issue of how we tackle that, particularly the under-representation of youth for example. In the latter case, the typical excuse will be "We cannot hire them as non-executives because they have not had enough life experience and experience generally." How are they ever going to get it? I do not understand why more quangos in particular but all these public bodies too - have not set up shadow boards to draw in the talent to give them practical experience to grow. It tends not to be done. I have made that plea several times. Coming back to your point here in terms of these appointments, to explain the conservatism point here whether it is non-executive or full-time jobs, often the panels will make the logical hire - not the inspired hire. The inspired hire is that person who is a bit different who does not fit the norm and is outwith the people we know about.
Q149 Paul Flynn: The evidence we heard this morning has reinforced the view that essentially your role is parasitic. You have virtually said so. If you disagree with that, where is the proof that your intervention and the vast fees paid to you has resulted in the improvement of the efficiency of the organisations?
Mr Davidson: You ask a direct question and I would be prepared to point directly to examples of organisations I have been involved with over the years.
Q150 Paul Flynn: You just said that often times they do not take your advice and Mr Boreham has said sometimes they are right not to take your advice.
Mr Davidson: I think that is fair.
Q151 Paul Flynn: On balance, where is the advantage in employing you and where is the proof of it?
Mr Davidson: My perspective may be somewhat different. The kind of client base I have had have tended to be the doomed, the dying or the failing type of organisations or the seriously aspirational that do not want boring candidates. They need seriously change focused candidates and those individuals do have to be sought after, particularly where we are trying to recruit for organisations with very poor reputations.
Chairman: You are not talking about the Speaker's Office, are you?
Q152 Paul Flynn: You were responsible for the advising of the Chair, Chief Executive and the 14 Commissioners of the Commission for Equalities and Human Rights.
Mr Davidson: A fascinating exercise.
Q153 Paul Flynn: One of the pinnacles of your career perhaps?
Mr Davidson: No, I think the Chair of the Electoral Commission would be the pinnacle.
Q154 Paul Flynn: The Chair was appointed at £160,000 a year, the Deputy Chair and the Commissioners get a daily allowance of £600 and £400 respectively, so not a lot of equality there. Three senior personnel resigned from the Commission within a week in March: the Chief Executive, the Group Director of Strategy, and one of its Commissioners. Sir Bernard Massie, another Commissioner, also sent a letter, a written warning, to his colleagues expressing concern at the Commissioner's performance. Do you think your advice and the cost of it were justified by the chaos that resulted from those appointments?
Mr Davidson: You are assuming that I gave advice that the particular individuals should be appointed which is not necessarily the case.
Q155 Paul Flynn: There is no need to reveal your involvement. How much was your organisation paid for this and what is your assessment of the result?
Mr Davidson: My understanding is that there is no criticism of the Chief Executive who has resigned, Nicola Brewer. She is a very highly regarded and talented individual. My understanding of the Commissioners who resigned is that it is more to do apparently with the criticism of the Chair and with regard to the Chair appointment. I did not make that appointment.
Q156 Paul Flynn: This is the parasitic nature of it. You go in, you give advice, and if it goes wrong it is nothing at all to do with you but if it goes right I presume you claim the credit. I have not seen any evidence from you yet of why you are necessary. We have seen this enormous explosion in the use of consultants. Where has been the resulting improvement in the efficiency of the bodies that employ the consultants? Is everything more wonderful now in organisations where consultants are used? Are they more efficient and more profitable than before? Where is the evidence?
Mr Davidson: If you want
to look at specifics, I would, in local authority terms, point to places like
Q157 Paul Flynn: You corrected one of my colleagues here who said that you are paid thousands and you said no you were not paid thousands, your organisations were paid thousands. You are not doing this work from the goodness of your heart or are volunteers in some way. In the interests of transparency, would you like to tell us what you are paid?
Mr Boreham: I have a copy of my P60, if you would like to see it.
Mr Davidson: I indicated that in the public sector what happens is the fees tend to be a flat rate for recruitment whereas in the private sector it is a percentage, therefore there is no salary inflation in that sense. To answer your question directly, in my last full year I got paid £190,000 so just below the Prime Minister in that particular case.
Q158 Paul Flynn: We know Mr Boreham is paid £126,000.
Mr Johnson: I used to work for a different management consultancy from the one I work with now. My base pay then was £170,000 and my whole earnings were about double that. Then I worked in the Cabinet Office where my base pay was £135,000 and my whole cash earnings were £150,000. Now I am with Mercer and they pay broadly in line with what is transparent.
Mr Evans: I am feeling considerably underpaid.
Q159 Paul Flynn: You are not going to tell us by how much you are underpaid. You do not have to.
Mr Evans: I am paid less than an MP.
Q160 Paul Flynn: Then you are grossly underpaid then. On the question of pay, we have seen the examples quoted of using the Prime Minister, or in Wales the First Minister, as a benchmark. The First Minister of Wales has something like six people working in the Welsh Assembly who are earning more than he does and there are 194 public workers earning more than the Prime Minister. One of the examples of this, what the people blame, are those who were recruiting at inflated salaries looking at the examples of the local authority public sector as well. Has not the whole pyramid of what we regard as being a just and fair pay system been distorted by this?
Mr Boreham: The Prime Minister's salary is a very bad basis on which to set other people's salaries. In reality, the Prime Minister's salary is a political compromise and the main earnings opportunity for a prime minister are not what he or she receives in office but the amount they are able to earn after leaving office from public speaking, directorships, publications and so on. It is an artificially low figure and, therefore, it is a bad basis for looking at other people's salaries. There is a danger that if, for example, were you to say that no-one gets paid more than the Prime Minister - I know that is something they are looking at in the Netherlands - any kind of artificial cap on salaries tends to lead to unintended consequences. Either that money leaks out in other less transparent unfortunate ways or you just cannot get the people to do the job.
Paul Flynn: That is a fascinating answer. I do not know what is the value of former prime ministers if we contrast Tony Blair and John Major in their capacity to earn outside, but we are greatly concerned about people using public office with an eye to future earnings, in particular where we get former ministers who have awarded contracts for billions of pounds who within a year of leaving office take jobs with those particular firms at large amounts of money. Is this a matter of concern?
Q161 Chairman: It may not be our concern.
Mr Boreham: It is outside our pay grade to comment on that.
Mr Johnson: I share Peter's view about the artificiality of using the Prime Minister's salary as a cap. On the other hand, I do think it is reasonable for people to explain and justify significant pay decisions. The Prime Minister is a highly paid individual and pay decisions that are higher than that would warrant clearer justification.
Q162 Paul Flynn: The First Division Association tells us there is no proof that performance-related pay increases the efficiency of an organisation. Quite persuasively they made the point that the de-motivating effect of those who do not get performance-related pay is so damaging that the general level of efficiency would go down. Part of the mythology of people like yourselves is that performance-related pay does work. Would you like to comment?
Mr Boreham: It is about saying if we deliver strong services to the public then it is reasonable that we are paid higher. We justify that high pay in the terms of the value we deliver. If we do not deliver, then we do not deserve those higher levels of pay and therefore our pay is reduced.
Mr Johnson: I have sat across from Jonathan Baume at the FDA many times having exactly this discussion because he represented people that I was responsible for. The reality is that there is evidence that it points in both directions. There is some evidence and research that would support the point that Jonathan is making. There is equally evidence and research that supports the point that well designed performance-related pay regimes do have a positive impact on performance and people inside those regimes have a positive attitude to the way they are managed. One has to be careful about speaking about one piece of research. I think the key is the point that Peter is making which is that there needs to be consequence for performance. If there is going to be consequence for under-performance, which I think is very appropriate, it is also appropriate that there is consequence for delivering expectations and beyond expectations. The issue is how much money to put into that kind of process. I think of the word "gearing". How much gearing do you put on the back of base pay to get that performance message through to the individual? At the moment my view is, having worked both in the public sector and advised it, that the level of gearing is too low. I do not think the level of gearing should be anything like the level of gearing one sees generally in the private sector but it is somewhere in between.
Q163 Paul Flynn: I appreciate what you said about the level of gearing and so on but there still seems to be a lack of any proof of what is the proper level of gearing in this and that the performance pay does work. Does such proof exist? Can you say absolutely categorically if we have a system that is based on performance rather than based on seniority or the job role that that is less effective than performance-related pay?
Mr Johnson: Proof is a difficult word with research but there is research that would point in the direction that well designed performance-related pay is effective in terms of improving performance of organisations.
Mr Boreham: Let me tell
you a story. I do some work in
Q164 Mr Prentice: Was the incentive just paying people a bit more to turn up for work?
Mr Boreham: I do not know exactly how it was organised. There was some kind of annual bonus payment linked to a number of things and one of them was to do with getting people to come to work. It was not just about me being paid to turn up but actually the whole team was paid if I turned up and then you end up with peer pressure and everybody working together.
Chairman: There was an awful row here recently when the CPS paid people for turning up at work during the snowy weather. People said it was outrageous. It is their job to turn up for work.
Q165 Mr Prentice: The Prime Minister wanted us to turn up on a daily basis.
Mr Boreham: The system that was used was in a fairly sophisticated way. There is always a danger of anything crude that you do the crude thing that you are supposed to do and you completely forget about the big picture.
Q166 Paul Flynn: Mr Davidson, I believe you take full credit for the advice that resulted in the appointment by Ken Livingstone of Bob Kiley. His potential salary linked to performance of £2 million over four years was the highest ever paid in the public sector in the UK. Looking back on that and the subsequent career of Bob Kiley, was that something you have any regrets about?
Mr Davidson: Ken Livingstone and his economic adviser negotiated that package directly. I believe I was paid the princely sum of £25,000 to do that recruitment back in those days and all profess themselves very comfortable with that. I recall that the Prime Minister, then Chancellor, refused point black to ever meet Mr Kiley through the entire period of his appointment which may have had some degree of impact on his ability to get the job done. At the time it was viewed as a very positive appointment. Indeed, as I understand it, Ken Livingstone still declares that to have been an appointment that set in train the transformation of London Transport.
Q167 Paul Flynn: I will not go into it or attack Mr Kiley in any way. The new Chair of the Electoral Commission, you were responsible for giving advice there on his salary?
Mr Davidson: I was.
Q168 Paul Flynn: It was subsequently reduced.
Mr Davidson: It was. At the beginning of this meeting here I commented that there were three categories of jobs: the chairs, non-executives and the others. One of the particular features of that appointment was that was a particularly narrow brief. It is the hardest recruitment exercise I have ever undertaken. It is a very high profile job and it is an incredibly important job that the organisation does and the challenges ahead. We had to try and find somebody who would clear three days of time a week to do this, from a very, very narrow pool indeed, and would have to give up in all cases some other work. I indicated that in my opinion in order to do that, if that is what they wanted, they would have to pay a significant sum for the job. It was at an awkward time, as I understand, in the Commons at the time. The appointment was delayed and delayed and then they decided it was indeed changed. My opinion is that they were very lucky indeed that the candidate concerned accepted that cut and still took the job. I think most of the candidates would have declined to take the job because they would have been giving up a lot more money altogether.
Q169 Paul Flynn: Mr Boreham, in answer to a previous question you said that if politicians decide on a level of salary they will decide on what looks good in the press. I presume it is not part of your experience that politicians might behave out of different motives and might decide on a level of salary because it happens to be just, fair and equitable. How do you square your conviction that politicians always go for low salaries with the experience of local government where we have seen an explosion of salaries by chief executives and those decisions were taken by politicians?
Mr Boreham: I am not sure
I was suggesting that politicians always set salaries low. I was saying it is difficult for politicians
to set salaries high because of the public interest point. I think the closer the politician is to the
organisation, the easier it is for them to reconcile the public interest to
keeping salaries low with the need to get on board a really high quality chief
executive. In local government there is
a very close link between the elected members and the chief executive and the
operations of the Council which if they are run effectively by the chief
executive will tend to lead the elected members being returned so there is an
equality of interest. If you have a
politician in
Q170 Paul Flynn: You yourself said sometimes you are right and sometimes you are wrong. Sometimes your advice is good and sometimes your advice is bad and that applies to politicians. Do you think the world is any better a place because of your existence and are you not really parasitic?
Mr Boreham: There is a question about what happens if we are not there. If we are not there then it is easier for the chief executive and the executives in the organisation to argue for themselves like shop stewards. It is harder for a remuneration committee or whoever is setting the remuneration to argue against them if they do not have that independent advice and broader perspective. When I have been into organisations that have been advised by other consultants, I normally find a reasonably well ordered set of pay arrangements. When I walk into an organisation for the first time that has not had access to professional advice, I often, not always, find that pay arrangements are quite a long way out of line with what I would normally expect to pay, sometimes too low but quite often too high, and that is because things have been set in a vacuum without professional advice.
Mr Davidson: I take the question on the chin. I would accept that in many cases head- hunters are parasitic I think it is fair to say. I think that in many cases what head-hunters do is equivalent to moving pieces around the jigsaw board. We solve one person's problem and thereby create a problem elsewhere. I think that is a fair challenge. The response to that then is we and our clients have an equal duty to try and develop new talent and that new talent has to be developed by the appropriate feedback given to the candidates we interview and in all cases try to encourage them to do better next time. What I think is not done sufficiently is the effort to develop the new talent - a point Chris made earlier, particularly within organisations. I think your challenge is fair.
Q171 David Heyes: You have some very complicated ways of answering, you remuneration consultants, a simple question: "How much should I pay my people." I have been making notes as we go along and the kind of mysterious language that you use about reward arrangements, reward propositions, variable compensation and you deploy your reward expertise in giving the advice and so on. It is just a matter of how much should we pay our people and an important part nowadays is pensions. There seems to be a perception that in the public sector pensions are generous, over-generous some people would say, compared with the private sector. I wonder whether that is true and whether that is at odds, for example, with the type of pension that the Fred Goodwins of the world get. Are we really too generous in our pension schemes in the public sector?
Mr Boreham: I think there are a number of factors here. First of all, the Fred Goodwin deal is reasonably common amongst private sector executives who have been around for a long time. If you have joined a FTSE 100 company in the last seven or eight years from the outside you are not going to be in a final salary scheme. You will be in a defined contribution scheme. I think that the public sector pensions for the vast majority of staff are a long way ahead of what those staff could get in the private sector, a very long way ahead, and the gap has widened. At executive level that is not so true because in the private sector executives receive proportionately greater pensions on their already high salaries.
Q172 David Heyes: You have a suggestion to make which is to cap public sector pensions, is that right?
Mr Boreham: That is right. In so far as you are providing somebody with a guaranteed income for life when they retire, I think that is a legitimate strategy but I question whether we need to guarantee somebody half of their salary as a local authority chief executive on maybe £200,000 plus a pension lump sum. It is reasonable to have a much lower guaranteed benefit, for example you cap the pensionable salary at £30,000, and that is an arbitrary figure. Above that level the pension is provided on a defined contribution basis in line with what happens in the private sector. That means you have much less of a guarantee as to what you would be paid but you are guaranteed a basic level of income. It is a mixed system.
Q173 David Heyes: I would like to see what your colleagues think about that suggestion. The thought that comes to my mind is with a cap like that you are going to pay the same sort of pensions to your top managers as the middle and even lower ranking managers and how does that sit with what you call a reward system where a pension is a pension?
Mr Johnson: Peter and I have never spoken about where we think public sector pensions ought to go. I have to say my thinking is very consistent with Peter's. When I was in the public sector I was quite open about where I thought, in the longer term, public sector pensions should go. The way I come at this is that the public sector employers are a large number of relatively low paid people delivering quite difficult and important services. Part of the compact between the country and those individuals can be a defined benefit pension scheme. Seeing that up to a number, whether it is £30,000 or £25,000 you can argue but seeing that defined benefit provision up to a certain salary, is a very reasonable part of that compact. Over and above that then I think the individual both has more income that they can choose to spend in whatever way they choose to spend it. As a consequence, bringing them into a defined contribution pension plan that they can supplement or not as they wish and have more financial freedom to do that feels the equitable way of getting the right balance between an employee who is able to prepare for retirement, on the one hand, and keeping the expense of that under control.
Mr Evans: I echo what Chris said. In a way there is a deal that is done with the public sector that people accept lower pay than they would get elsewhere in return for having a more generous pension arrangement.
Mr Boreham: There is also the pension backdating cost. If you have a long-serving executive who receives a pay rise, the pension cost of backdating that for the whole of their service dwarves the pay rise. If you have somebody who is a senior officer in local government who becomes a chief executive, the pension cost can run into millions.
Mr Johnson: This is a major distortion and does need to be addressed. My experience is when senior pay decisions are made that particular point is not taken fully into account which is problematic. Some of the moves that have taken place in the public sector, for example the Civil Service move into a clear average pension scheme rather than a final salary one, is a very a helpful move because it overcomes the effect that Peter has just described.
Q174 David Heyes: Can I pick up a point from earlier, particularly with David Evans, the performance-related pay bonuses for top managers, particularly in the NHS, is an example. The idea that the top managers can be motivated to deliver in their organisation with a performance package, is that not at odds with the fact that it is a collegiate organisation a hospital or a health trust? It depends on the efforts of all those who work there and not just of the top managers. They set the style and lead and so on but the actual delivery of the quality is in the hands of potentially thousands of people who do not seem to have that kind of incentive. How does that sit? Are there not inbuilt tensions in that around jealousies and so on?
Mr Evans: That is the view of the NHS and that is why compared to other parts of the public sector, and certainly the private sector, very few trust chief executives are actually on performance-related pay. It is probably less than 1 in 5, about 18% of people who are actually on performance-related pay bonuses and the level of bonus is actually quite modest. It would be 5% or 6% of salary and I think that reflects that view. There is even unease amongst some executive directors and some chief executives for precisely the reasons you said. They do not feel that they are solely responsible for the performance of the organisation. It is the culture of the NHS that it is a team effort.
Q175 David Heyes: We heard Peter Boreham say that he is advising remuneration committees of foundation hospitals on how they should have a variable compensation package. I presume by that you mean performance bonus for the top managers.
Mr Boreham: Your point is very well made. The boards we work with would be much happier if they could implement something that works across the organisation. The reality is most of their employees are on national agreements under Agenda for Change so it is much harder to do anything with the broad employee population. You have to bolt it on and put your costs up whereas at executive level they have more freedom to do things with people's remuneration. Most of those I worked with would like to do something broader but national pay setting makes it harder for them to do that. The point about working together is an important one. In the public sector when we think about performance-related pay we tend to think of the performance of the individual. Personally I am much happier if it is about the performance of the organisation. I think about the work we have been doing for a Mental Health Trust on incentives. In reality the director of nursing, the medical director, the director who is responsible for the linkages with the local authority for managing people in the community are all working together and it is difficult to say the nursing director did a great job; it is more about what did the trust as a whole deliver.
Mr Johnson: I subscribe to three points in this area and I have advocated it for many years. It is important that the philosophy, policy, strategy, whatever word you care to choose, around pay, is consistent from top to bottom and embraces the whole of the workforce. The practice will vary for different parts of the workforce but the underlying policy, in my view, should be consistent because the workforce as a whole is engaged in the work of whatever that organisation is. The second point I would make is the move we need to be making with public sector workers is towards variable pay linked to performance for the whole workforce and not just for senior people. I would not draw the conclusion because it does not apply everywhere or we do not do something at the top levels. I would come the other way around and say it is important that we have more linkage to performance of pay for everyone. Peter's observation about how that is done is a vital point. I think for many people, particularly at the front line, it is more about how the organisation has done than how they have done as an individual. The other point I would make is that one of the challenges in public sector pay is the pay structures are based around incremental progression and largely time in the job is determined by how much the individual gets paid. There are two issues here, one is that is deeply inflationary. If you look at the way pay awards are described in the public sector, they are described as being a 2% or 3% increase and then the individual is also getting progression through the pay system so they are probably coming through with 5% or 6%, sometimes 7% increases.
Q176 David Heyes: But they are getting more experience and delivering more quality.
Mr Johnson: There comes a point when the growing experience does not automatically or necessarily deliver better performance. Initially when someone is new in the job experience, and the acquisition of experience, has an important impact on their performance but it tails off, and it tails off quicker than I think the pay systems give credit for. The inflationary drive in the public sector pay systems is something that worries me a lot. The other drive in public sector pay systems about largely rewarding people for having a job rather than rewarding people for doing the job well I think gets in the way of some of the service delivery improvements that we would all like to see.
Q177 David Heyes: What do you mean by that?
Mr Johnson: If I am a junior civil servant working in the Ministry of Defence then no matter how hard I do my job and how effectively I do my job my pay is determined by the pay scale I am in and how long I have been in that pay scale. I do not have any influence as a junior civil servant on my pay because of the performance I deliver on behalf of say the Ministry of Defence. I think that is problematic.
Chairman: Interesting points all of them. We are into the last five minutes.
Q178 Mr Prentice: I think people ought to be paid by the amount of happiness they generate and I want to see happy organisations. When you are talking about performance, just listening to the exchange there I thought what kind of performance is being measured. The Chief Executive in the Staffordshire NHS Trust probably got performance payment for bringing the deficit down and yet we know after everything that happened there that there were not enough matrons and not enough consultants. Perhaps we are rewarding people for the wrong kind of performance. I was very taken by what Mr Davidson said about parallel or shadow remuneration committees. I was interested in what the other three of you thought about that. Mr Davidson said there are not enough young people with a different kind of life experience to go on remuneration committees. Why do we not establish shadow remuneration committees to advise the real remuneration committee? Do you think that is completely fanciful or do you think that is something we ought to give more consideration to?
Mr Boreham: I think we have slightly misrepresented Mr Davidson. What he was talking about is giving people the opportunity to get used to be being non-executive directors. That may include remuneration but it is not going to be the main part of what they are doing. It is giving people the experience and developing a cadre of potential non-executive directors in the future that can be used within the public service. We made a very similar recommendation to a government department we did some work for recently. It was a very useful proposition. Remuneration would be part of that but I do not think we want to be setting up layers and layers of remuneration committees trying to second guess each other's decisions.
Q179 Mr Prentice: Did I misrepresent you?
Mr Davidson: My point was the creation of shadow boards as a whole within which remuneration committees and audit committees might be there too. I would personally advocate shadow boards, and individual shadowing particularly, in all they do.
Q180 Mr Prentice: Who would be on these shadow boards? Could I get on the shadow board of the Royal Bank of Scotland which is a State-owned bank now? I have very firm views about remuneration and banking.
Mr Boreham: I am sure UKFI[3] would be delighted to hear them.
Mr Johnson: I think a shadow process is a good process for giving people exposure, helping them to develop experience and widening mechanisms for doing that but I think you still have to be really clear about where accountability sits. I do not think the shadow board proposition is about somehow fuzzing or sharing accountability. Accountability still sits with the remuneration committee rather than the shadow remuneration committee.
Q181 Kelvin
Mr Boreham: The point is that salaries then were much smaller. If we were paying NHS chief executives £100,000 rather than £200,000 then your argument would have weight. If we are paying them £200,000, I believe some of that should be linked to performance.
Mr Johnson: It is very important to be clear about how one defines performance. The best performance management systems I have seen in both the public and the private sector are much more rounded than you describe in terms of what elements of performance people are being held to account for. It is the quality of delivery as well as the cost of delivery and not just the cost. Secondly, I think the good systems also focus very strongly on the behaviour of executives and how they do their job, not just the performance they deliver but the manner in which they do it and whether they deliver on it and do their jobs in a way that is consistent with the values of the organisation.
Q182 Mr Prentice: That is a key point. In the private sector we are told that people require huge sums of money to deliver shareholder value. What does shareholder value mean? It means regular big dividends to the shareholders but maybe there are other considerations like retaining profit, putting it into research and developing products for the future.
Mr Boreham: Shareholder
value should include all of those things.
Shareholder value is a forward looking measure. If you have a business that is failing to
invest in the future, failing to manage its people properly and develop talent,
failing to interact properly with customers then the analysts in the City of
Q183 Chairman: On your point, people not sharing the values of the organisation and therefore getting marked down in performance terms, who decides that?
Mr Johnson: The senior team of an organisation would work through what the values of the organisation are and then that becomes the requirement. The line manager is an important part of the judgment about whether an individual has delivered to that. If you are talking about the chief executive, then you are looking at the Chair and the board as key players in determining whether the chief executive has not only delivered but has exemplified the values of the organisation.
Mr Boreham: In the private sector, which is where I do most of my work, the key role of the remuneration committee is about performance management of the organisation and the chief executive.
Q184 Chairman: We could do much more in the public sector. We know the Government is taking a lot more interest in these issues at the moment which is the point about transparency at local government level and so on. It said it is going to do a first-principles review of remuneration packages for NDPB chief executives. In very short terms, is this a good development?
Mr Boreham: Yes, because NDPB chief executives and non-executives' pay is all over the place. If you were trying to look at how it should be, it should be related to how big is this organisation, how complicated, to what level do we need commercial experience in those kinds of roles and to what extent has responsibility been devolved to those bodies but when you track those factors you cannot translate that into the differentials of pay.
Mr Davidson: I would agree with that totally based on the experience of going in and talking to different departments about the organisation's response. There is no coherence of any kind.
Mr Johnson: I fully agree. My only qualification is I would like to see that kind of work done more broadly.
Q185 Chairman: Could I finish by asking that in your memorandum to us[4] you gave us some very helpful recommendations particularly those on governance. I want to see if we have assent to these sorts of things. "An individual review body should advise on the reward principles and provide guidance to national and local government as appropriate for the different parts of the public sector." The proposition is an independent review body to lay down the principles for different areas.
Mr Boreham: If it was principles-based rather than laying down particular salaries, that would be very helpful. In the private sector we have the Association of British Insurers and the National Association of Pension Funds playing exactly that role.
Q186 Chairman: So there is assent to that. "Executive reward decisions, policy and application to individuals should be made through remuneration committees that include independent members and report to ministers or authority members or boards as appropriate to each organisation." That model of remuneration committee of independent members, is that something that people assent to?
Mr Boreham: Yes.
Chairman: I think we have agreed on this already: "Executive rewards should be published in annual reports by analogy with requirements for public companies." We have said yes to that. Is there anything you wanted to say to us?
Q187 Mr Prentice: Did you feel uncomfortable disclosing your salaries to us today?
Mr Johnson: I was quite careful not to say precisely what my salary is from Mercer because I know Mercer prefers that information is between the organisation and the individual.
Q188 Mr Prentice: Do you think it would be better, and this is a point that Polly Toynbee made to us before, if everyone was not so uptight about what they got paid and they just put it into the public arena?
Mr Boreham: I do not think there is a public interest in what we as private employees of private organisations are paid. There is public interest legitimately in people who are running public organisations. There is a legitimate public interest in people who are running listed companies with diverse boards of shareholders. In a privately owned company with private employees, no, I do not think my pay is in the public interest.
Q189 Chairman: Is there anything we have not asked?
Mr Davidson: I would hope that in the eventual report you produce that you will look at the whole supply issue of candidates which I do feel is a significant factor in the reflection on salaries. It may too easily get missed.
Mr Johnson: I endorse that. The recruitment, the development, the management and the retention of talent is the fundamental driver for how the public sector thinks about reward.
Mr Boreham: It is a perceived shortage of talent that drives salaries up in both the public and private sector and some of it, as Hamish has suggested, is perceived rather than real.
Chairman: That is a very important point for us. We have had some vigorous exchange but I am afraid that is what we do. You have responded extremely well. Could I say you have been extremely helpful to us and it is a pleasure to talk to people who actually know what they are talking about. Thank you very much indeed.
[1] Comprehensive Performance Assessment
[2] EXP 12
[3]
[4] EXP 10