UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 304-iiiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREPublic Administration COMMITTEE
Executive pay in the public sector
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Public Administration Committee
on
Members present
Dr Tony Wright, in the Chair
Mr David Burrowes
Paul Flynn
David Heyes
Kelvin
Julie Morgan
Mr Gordon Prentice
Mr Charles Walker
________________
Examination of Witnesses
Witnesses: Ms Millie Banerjee, Chair, Remuneration Committee, Ofcom; Mr Tim Melville-Ross, Chair, Higher Education Funding Council for England; and Dr Anne Wright, Chair, National Lottery Commission, gave evidence.
Q190 Chairman: Let me welcome our witnesses - can I call you our guests - this morning. It is very nice to see you. We have Millie Banerjee, who is Chair of Ofcom's Remuneration Committee, Tim Melville-Ross, who is Chair of the Higher Education Funding Council and Dr Anne Wright, who is Chair of the National Lottery Commission, amongst the many other things that you all do but that is why we have you here. As you know, the Committee is interested in looking at the whole issue of executive pay in the public sector. Our inquiries eventually brought us to you, because we have not yet got our minds around the whole issue public bodies and how remuneration takes place there, and you are all centrally involved in that. I do not know if any or all of you would like to say anything just by way of introduction or whether you would like us to ask some questions.
Ms Banerjee: We are happy to go to questions.
Q191 Chairman: Let me ask you in a general sense. One of the things that concerns us is whether is there is enough consistency in the way that remuneration is set across the public sector. I particularly want to ask you in terms of your knowledge of a variety of public bodies whether you think it happens in a coherent way or whether it is all a bit of a mess. Who wants to start on that?
Mr Melville-Ross: I think there is a degree of consistency, if I can just say a word
or two about the process for determining senior salaries, and I will be very
specific about the process for determining the salary of the Chief Executive of
the Higher Education Funding Council.
The internal process is that there is a small Remuneration Committee,
consisting of members of the Board, which I chair, but clearly, there is
considerable involvement on the part of the relevant government department in determining
the package for the Chief Executive. The
work that we do to come up with the right sort of figure is really quite
detailed in terms of what you might call the market analysis that we carry
out. That market analysis actually runs
across both private and public sectors, on the argument that there is a certain
amount of interplay between the two. So
whilst, bluntly, in the public sector not a lot of importance is attached to
the pay of private-sector chief executives, nevertheless, it is part of the
process that an external consultancy would go through. There were really two main lines of reasoning
that produced the package that is now paid.
One was by reference to the public sector as a whole, NDPBs[1],
senior civil servants and so on, with, if you like, a bit of job evaluation
going on as part of the process, trying to establish exactly where in, say, a
civil service hierarchy the chief executive of a particular NDPB would
sit. That was one part of process. The other part is, given the sectoral
specialism, the likelihood - not the certainty but the likelihood - that any
Q192 Chairman: That is helpful. Can I ask the others to come in.
Ms Banerjee: Our process is somewhat different. We set our own salaries because we are an independent regulator and Parliament set us up to be separate from interference of any kind. Our consistency is derived from looking at a number of inputs. We look at where public sector pay is going because that is one of our inputs, and we are publicly funded to 60% of our funding, 40% being from industry. We also look at what is happening in the sector that we regulate. However, we could never attempt to pay anything like the salaries that are paid in the sector that we regulate but we do need to understand where the packages are going in those sectors so that we know how to recruit the best possible skills. The other point about consistency I think it is important to look at, Chairman, is what we are talking about. Your own terms of reference make it very clear that you are looking not just at pay but at pay and benefits. In comparing salaries sometimes we forget the sort of benefits that go with them. If you look at a defined benefit scheme, the final salary scheme that, for instance, civil servants are paid, which we in Ofcom do not offer and we made it very clear from the beginning that we would not offer to new entrants, the value of that final salary scheme is actually quite significant. We have done some work and if you look at buying an equivalent money purchase scheme, it is a significant amount of money which should be seen as a premium or a discount, depending which way you look at it, to the salary we offer. To give you an example, if you are paid £60,000 a year and you have a pension scheme that, say, pays out in 15 years, a money purchase scheme today would cost you £50,000 a year to buy. So when you are looking at salaries, you cannot be looking at £60,000; you have to be looking at £60,000 plus £50,000. So in looking at consistencies, I think we do need to look at the whole package.
Dr Wright: I would also say in my experience there is a good deal of consistency both in relation to what I would call governance - that is, the way remuneration committees work -and also in relation to the kind of advice and guidance that is available to public bodies. As far as the National Lottery Commission is concerned, what I would add to what the others have said in relation to setting the pay of staff is that we do respond on an annual basis to a pay remit, which has to be returned to the sponsor department, so the decisions are always made within that framework, which has the sight of the sponsor department and which we take care is within the budget looking ahead to the forthcoming year. As far as the Chief Executive's salary is concerned, again, the most recent contract provided for the Chief Executive of the Commission was again subject to external review, a study of market data, we looked particularly at the median across a range of public sector, including our particular sector, possibly regulators and so on, and the contract of employment was drawn up in the light of that. So it is both external advice, looking across the piece, and looking at whatever benchmark data is available to us.
Q193 Chairman: So when you read all these stories in the press about what are seen to be stratospheric public sector salaries with lots of noughts on the end, and people say, "How can this be?" your answer is that you look at the sector you are in, you look at the market for the job and that is the outturn?
Dr Wright: Yes, absolutely, and I would add to that in the case of the Lottery Commission, the regulator, in recent years we have had particular regard to the challenges, and I think that is the important thing; the challenges of the job and the challenges of delivery. Most public bodies, in my experience, are concerned with delivery, quite rightly, and looking to results, so the nature of the task is particularly important. For us, for example, over the last four years we have been conducting the competition for the third licence to run the lottery, which finally came into being on 1 February this year, and we have particular challenges and we need particular skills to address that. Overall, I would say also there is consistency but, looking at the stratospheric salaries you have referred to, I think the point that was made about the specialist sectors is really important. As far as we are concerned, the tasks that the Lottery Commission has to undertake are very much concerned with propriety, audit, vetting and so on, a lot of compliance functions, financial and regulatory, and so we are looking to particular skills to carry that out throughout the organisation.
Q194 Chairman: When someone just looks at the figures - and we have this army of researchers who do this for us, of course - and I look at our organisations and the variation in what you are paying your people, the figures for 2007-2008 are: Mark Harris, the Chief Executive of the National Lottery Commission, received £106,717 in salary, £27,070 in pension contributions and £16,008 in bonus, which is 15% of salary. If we turn to David Eastwood, who is the Chief Executive of HEFCE, he received £204,771 in salary, including a bonus payment of up to 10% and £26,148 in pension contributions. Finally, if we turn to Ed Richards, the Chief Executive of Ofcom, he received total remuneration of £417,581 including a bonus of 20% of his salary, other benefits and pension contribution. So we have Ed Richards of Ofcom earning twice as much as David Eastwood of HEFCE, who in turn earns twice as much as Mark Harris of the National Lottery. Is this because one is better than the other? Is it because one organisation is more important than the other? Is it because one job, one activity, is more crucial? What is the logic behind this?
Ms Banerjee: First of all, if I can just step back for a moment, when Ofcom was
put in place we thought very carefully about what sort of packages we would
give. In 2004 there were five regulators
which were then collapsed into one. If
you add up the salaries of the individual five regulators in 2004, it was
£810,000, and two of those people were in a final salary scheme. That is where we started from. Of course, we were never going to pay that
much because we were going to consolidate and be a very efficient
regulator. Also what we have looked at
is this point about final salary schemes.
We have not offered a final salary scheme so Ed Richards' basic salary
you have to take into account is not linked to a final salary scheme, so there
is a premium that we would have had to pay in order to make sure that he does
get the appropriate pension contributions.
Much more important than that, you do have to look at the job that he is
required to do, to build on what my colleague Dr Wright has said. We regulate an industry which is worth £50
million. It is a very active,
ferociously competitive, very litigious environment. Even yesterday you saw the launch of the Digital
Britain report. Every single chapter
of that has some kind of Ofcom environment.
In order to operate in that industry, you need big regulators with very
competent people at the top who are able to eyeball the equally competent and
ferocious people who lead some of the industries that we regulate. So you have to have people who are able to
deal with it. Having said that, we are
not paying private-sector salaries, we are not trying to match the salaries of
the people we regulate, but we do have to have a reasonable package to attract
the right kind of skills, and also we have to incentivise the people to deliver
what they have delivered. So in Ofcom we
have gone from 1,100 people down to 850 people since we were born; our costs
are 17% lower than they were when we were born; this is the fifth year we have
delivered a less than
Q195 Chairman: We are simple folk on humble salaries and we find all these figures to be quite starry-eyed. Is it the case that you are saying that you have to pay over £400,000 a year so that someone can, as you say, "eyeball" the private sector and that nobody would do this for £200,000 a year?
Ms Banerjee: Could I just make the point first of all that it is not pay; it is the total package, and the nature of the package is very important because you do need to look at the component that is particularly to do with pension, and the security of a final salary pension is absolutely enormous; anybody who has that realises that and that is a pension for life. So it is not just pay, and yes, I am saying that we need to recruit the right kind of people to do the job that they are required to do. One of the things that is very obvious from our history is that small regulators find it quite difficult to regulate these very large institutions and to have a relationship with them that is businesslike and to deliver what they are required to deliver. When you are a regulator, particularly speaking about Ofcom, it is not enough just to be able to exercise your powers; you have to also be influential, energetic, and intellectually competent to deal with very large companies. We have BSkyB, we regulate part of the BBC, we regulate BT, we regulate Vodafone, we regulator O2 - we have to have people who are able to do that job in the way that it requires to be done.
Q196 Chairman: So you are all paying the minimum amount that you can pay to get the kind of people that you need in the sectors that you operate in - is that the position?
Ms Banerjee: I believe we have to be competitive. People do not come to work in Ofcom because of the pay. They do not. In fact, we have people coming to work in Ofcom, some of our specialist lawyers, for instance, competition lawyers, who we need, who actually take a cut in pay. They do not stay long; they stay about five years but they like to come to an organisation like Ofcom as part of their career development.
Q197 Chairman: This is contradictory now, is it not? You cannot say people do not come to Ofcom because of the pay, having just argued that you have to pay the amount to get the kind of people that you need.
Ms Banerjee: What I was trying to say about that is they would be able to claim more total benefit if they were working outside Ofcom.
Q198 Chairman: Yes, but if they do not come for the pay, why are we paying them these enormous salaries?
Ms Banerjee: No, I think that the benefits we have to give are the minimum that they have to have before we can attract them. People do not just go to work for the benefits they get. You know that. It is the total package: the pay, the pension, the benefits, the environment in which they work, plus the job that they do. A lot of people come to us because they want to work in the public sector for a period in their lives, and we encourage them, and they make their own decisions on that total package but if we did not pay what we pay, I do not think we would get the right kind of people. I have been there for five years and I am very convinced from the data that we collect regularly, as our colleagues have said, we look very carefully at what is happening in the marketplace because we know we cannot match the private-sector salaries.
Q199 Mr Prentice: Although the private sector will pay a premium for people who have worked at Ofcom, inside the regulator, seeing how the machinery works. When they leave Ofcom after two or three years, they will be able to walk into the private sector and get a stratospheric salary.
Ms Banerjee: They do not actually. They are not actually allowed to walk into the private sector. Every one of our senior executives has a contract where we isolate them for varying periods of time, sometimes for a whole 12 months, when they are not allowed to work with any company which has ever had a licence from Ofcom or is about to apply for a licence to Ofcom. Like any other job, anybody who changes jobs takes their experience of the job they have done before to the next job that they do, and we encourage that because it is a healthy change-around of talent between the private sector and the public sector.
Mr Melville-Ross: I just wanted to give you a slightly different angle on this. Clearly, there is an issue implicit in the
way you asked your question that all these organisations are similar, and they
are not. Clearly, what Ofcom does, what HEFCE
does, what the Lottery Commission do are all very different things. Just to illustrate the point, by narrowing
the debate down to universities, which is where we by and large, if you like,
fish for our chief executive talent, just in what you might think of as a
fairly homogenous group, the range of salaries for vice-chancellors is, roughly
speaking, the range of have just described, from just over £100,000 to well
over £400,000. You might say, "They are
doing the same sort of job so why is there so much difference?" The reality is that universities are very
different places. The individual on over
£400,000 runs
Dr Wright: Could I pick up one of the points you made in relation to that variation in relation to the Lottery Commission? You mentioned the 10 per cent bonus figure and I think it was 20% in that year that you quoted for us. I just wanted to say for the benefit of information of the Committee that in relation to the Lottery Commission - and I cannot speak for others -the only payment that can be made to the Chief Executive on an annual basis once that initial salary is set is technically a bonus payment, of which a part can be consolidated, and that too is solely on the basis of performance, and there is quite strict regime there. The reason for the 20%, I would add, is that when a new contract was put in place in 2005, we took account of the revised guidance from the sponsor department raising the 15% bonus payment to 20% in the year, and we did that very specifically, not just to go to the maximum but because we were mindful of the particular challenges that faced the Commission and our desire for retention, to give the Remuneration Committee a greater discretion in being able to reward performance during those crucial years.
Q200 Mr
Prentice: I have this delicious quote from
you, Tim, from The Independent when you were looking back at your time
at the
Mr Melville-Ross: Yes, I do but first of all, the comments that you have managed to find that I made some years ago were very much with reference to the private sector.
Q201 Mr Prentice: I am interested in the organisations that are difficult to run. That is the point.
Mr Melville-Ross: Sure, absolutely. Part of
the point though was to do with difficulty in terms of creating real wealth,
and I have no difficulty - just to talk about the private sector for one moment
and then I will come back to universities - with the proposition that if you
run huge risks, you create an organisation, you build it in such a way that you
transform the lives of many of the people, substantial rewards can flow from
that and I am very happy with that. What
I am much less happy about is people who have relatively straightforward jobs
running relatively straightforward organisations being paid packages which are
quite similar to those sometimes which really, truly entrepreneurial
individuals rightly enjoy. Now let us
make that point with reference to universities.
Clearly, there is, on the face of it, a similarity between one
university and another but if you look into the difference between the major
research-based universities, like Imperial College, Oxford, Cambridge, King's
College London,
Q202 Chairman: Yale.
Mr Melville-Ross: Yale, thank you. There is this market point which is very relevant but it is also to do with complexity, with international regard, with being an almost unique individual in a very talented environment, and by no stretch of the imagination would all the universities in the UK aspire to that or claim that level of complexity or international excellence. They do a good job but of a fundamentally different kind, and so the rewards are commensurately lower.
Q203 Mr Prentice: What I take from that is that these huge salaries that are eye-watering - £400,000, £500,000, £600,000, £800,000 a year - go to people running organisations that are inherently quite difficult to run.
Mr Melville-Ross: Yes.
Q204 Mr Prentice: And people should not get these sky-high salaries if they are running an organisation that can comfortably coast along?
Mr Melville-Ross: Fair enough, yes.
Q205 Chairman: You do not see in the job advertisements, do you, "This is a relatively easy organisation to run"? It is always "challenging", so people do not quite get the truth about this.
Mr Melville-Ross: I think they do but I would not be influenced by that kind of advertisement. Essentially, people pretty soon find out just how complex an organisation is to run.
Q206 David Heyes: In this hierarchy then Anne Wright's organisation is very easy to run, yours is quite difficult and Millie's is phenomenally complicated.
Mr Melville-Ross: Since I made the point, I am making one of a number of points which determine how the salaries are set. It is an important point but there are a great many others.
Q207 David Heyes: The reality is that all of your organisations are equally demanding, I would guess. You operate in different sectors, you deliver different functions, but the demands on your chief executives, your top executives, are of a very similar nature.
Ms Banerjee: I do not think I agree with that. I think different organisations are required to do different tasks. Different organisations are at different times in their life cycles and that has to be reflected. I think complexity does vary and your context also varies. As I said earlier, our organisation operates in a very complex context. It is not a stable environment. It is fast-moving, it is changing every day. So I do not think they are the same and if you look at the public sector as a whole, just to broaden the debate, there is a whole range of institutions now in the public sector which are away from central government because in the last 10-12 years lots of tasks have been moved out of the general public sector. I have been around the public sector and my own experience is that there are big differences. I have chaired smaller organisations which have a relatively narrow remit, a small number of staff, a relatively small budget - they are still inherently interesting to run but they are not quite as complex as a much larger organisation.
Q208 David Heyes: Let me pursue that point a little further with you. Would it help in your difficult job of devising salary structures, reward systems, if there were an independent pay review body that could cover senior executives throughout the public sector, including your bodies? Would that be progress?
Ms Banerjee: That is an interesting suggestion. I can see that people would feel that there might be some benefit in that but I would see some practical difficulties. This really goes back to the point I have just made, which is that there is such a range of organisations that you might find that the pay review body ends up making very generalist recommendations which actually do not fit any organisations and become slightly defeating when you get dysfunctional behaviour of trying to find packages around what the review body says to make sure that you can attract the right kind of people. I think that might become very difficult because the public sector is so diverse that moment.
Dr Wright: I do have direct experience of two pay review bodies. I chair the schoolteachers' one and before that for six years I was a member of the Armed Forces pay review body. I would like to say that I admire greatly the good practice of review bodies and I think there is a lot of good practice that perhaps could be learnt and built on across the public sector but on the whole, I probably would agree that a single pay review body across the public sector, or even, let us say, for chief executives of NDPBs, which might be another thing that might be looked at, is probably undesirable and impractical really, too complex. The cycle of decisions is such that it would be a huge amount of work, would probably cost a great deal, and I think there is a value that one has to recognise of governance and remuneration committees which are close to the challenge and close to the market. Having said that, I think that there might well be scope, as I say, for learning lessons from that, particularly in relation to the kind of data and evidence that is provided, which could be helpful, I think, perhaps benchmarking data, something like that, across sectors.
Mr Melville-Ross: I would simply say firstly, I would endorse what my colleagues have said but I would go on to say that, certainly as far as HEFCE is concerned, we do take account of the Senior Salaries Review Board recommendations. You will remember the very first answer I gave when I was talking about the different influences that are brought to bear in determining the kind of package that we come up with.
Q209 David Heyes: The SSRB[3] has a fairly narrow remit, does it not? What I am suggesting is something that would have a much broader scope.
Mr Melville-Ross: The broader it is, the more complex the issues you have to address. We have to recognise that, I am afraid. We may not like it but we are operating, even in the public sector, in a market environment and these influences have to be taken into account. The more you, in a sense, with a small "l", legislate for pay, the more difficult it is to accommodate some of the influences which I referred to earlier.
Q210 David Heyes: Could there be a role for such a body if it were advisory, if it were to do, as you have suggested, the benchmarking, for instance, that would help to bring some more order and more balance to these very disparate decisions that you need to make?
Dr Wright: I would think so. It might not be a body as we know, the pay review bodies at the moment. It might be, for example, the pay review bodies, in my view are very well served by the independent secretariat in the Office of Manpower Economics, which provides a good deal of the data that we use. It might be possible - I do not know - to have something like that or to extend that so that there was this co-ordinated data available, perhaps in families of bodies. These are different types of bodies, different markets, regulators and so on. Perhaps there might be something there that would help us, to add to the support and advice we have already.
Ms Banerjee: We do take account of data that is available when we set our salaries. One of the pieces of data we look at is what the pay review bodies are saying. This year, for instance, the Civil Service review body is suggesting, I think, a 1.2% rise. Our rise is nil. So yes, we have taken account of what they said but we have decided independently that nobody is going to get a pay rise this year in Ofcom, and that is the decision we have made. But we do take account of the data and we also, of course, look at what is happening in the marketplace that we regulate.
Q211 Mr Walker: Bonuses. I have always been in jobs where the bonus was keeping the job if you performed, but, clearly, I have worked in a different environment to most of you. David Eastwood, Chief Executive of HEFCE, received a bonus payment of up to 10%. Is that a cap of 10%?
Mr Melville-Ross: Yes.
Q212 Mr Walker: How many times have you not paid the bonus?
Mr Melville-Ross: He was paid it twice because he was with the organisation just for two years.
Q213 Mr Walker: What I think we need to establish is, are these real bonuses or are these just part of the salary and they are always paid bonuses? You will always pay the bonus, will you not?
Mr Melville-Ross: No, no, absolutely not. The maximum is 10%, for a start. Secondly, there is a sliding scale of achievement, outstanding achievement, excellent achievement, and so on, down, and a whole series of objectives which I as Chair of the organisation have to evaluate the Chief Executive's performance against. For example, quite a lot of this is inevitably subjective because a lot of his objectives are to do with relationships with government departments, relationships with the sector and so on, but we work as hard as we can to introduce quantified objectives, the organisation's key performance indicators, into the way the bonus is determined and, if those are not achieved, and if there is a judgement that the qualitative elements of the bonus scheme have not been achieved, David would not have got anything like 10%.
Q214 Mr Walker: How long has HEFCE been around for?
Mr Melville-Ross: Since the early 1990s. It was the successor to the University Grants Commission.
Q215 Mr Walker: How long have bonuses been around for?
Mr Melville-Ross: I do not know.
Q216 Mr Walker: I think what would be very helpful is if you could provide the Committee with a note showing for each year what the maximum bonus that could be earned was and how much of that bonus was paid, because then we can ascertain whether it really is a bonus or just part of the salary. Can I ask the same question of you: how many times, in your experience of Ofcom, has the maximum or near-maximum bonus not been achieved?
Ms Banerjee: I cannot tell you offhand but I can certainly give you a note to that effect. My memory is that there were several. We have only been there for five years and there have been times when we have not paid the maximum but, as Tim has said, we have a very robust process on setting the objectives and then reviewing the objectives, and we make an independent decision on whether the bonus is achieved or not and we do not make a payment of the bonus on the basis that it is part of the salary. This year none of our senior team are getting a bonus because they themselves said that they would like to forego their bonus.
Q217 Mr Walker: This year is a special year because we have a recession. I understand that as soon as the leader of my party made a statement on pay, you froze pay at Ofcom. It was shortly after. I am sure it was just a coincidence.
Ms Banerjee: No, we decided that nobody in Ofcom would get a pay rise this year as part of a Remuneration Committee exercise taking into account what was happening in our industry and taking into account affordability and all the other issues that we normally do.
Q218 Mr Walker: I think what we actually need from all three witnesses is the details of your bonus scheme and how it is paid out, because I think there is genuine concern. The public are concerned about lots of things, and we are not in a very strong position as Members of Parliament to be gruelling anyone at the moment but there is concern over bonus payments because many bonus payments look like they are contractual as opposed to genuinely being earned for outstanding performance. Mr Melville-Ross, you have experience of the City - is that right? Do you have a finance/City background or have I got that totally wrong?
Mr Melville-Ross: Go on anyway.
Q219 Mr Walker: We talk about the war for talent and my particular bugbear is the Financial Services Authority. They are stuffed with money, absolutely gorged with money. Hector Sants - and I could be wrong - is on over £600,000, astronomical sums of money, yet he and his senior management team presided over the most monumental disaster imaginable. It was not all their fault but, quite frankly, were they playing croquet for the year before this blew up? What were they doing to earn their salary? We tell the taxpayer you have to pay to get the best people, and we pay £600,000, which is, by anybody's standards, a vast sum of money, and they are AWOL. What is your view on that?
Mr Melville-Ross: I am not quite sure what this has to do with public sector pay.
Q220 Mr Walker: The FSA is public sector.
Mr Melville-Ross: I will give you a response: because the FSA has to operate very much in the private sector. The senior people employed by the FSA are from the banking sector.
Q221 Mr Walker: So does Ofcom, and to Ofcom's credit, you have not had a disaster yet, like the FSA.
Mr Melville-Ross: I suddenly feel as though I am defending the FSA, which I am not here to do. Let me just give you what I hope is a helpful response. You say by anybody's standards £600,000 is a lot of money. By City standards it is not, I have to tell you. The sorts of packages that have been enjoyed by people running banks, who have had even more disastrous experiences than the FSA itself, are vastly greater than that. The FSA does have a monumentally difficult job. I am Chairman of an insurance company, so I have a lot of experience of the FSA, and it is a fiendishly difficult role to perform. I acknowledge that a lot of mistakes were made in many respects, but in response to that the FSA is working hard to improve its capability, and they do need very good people. If you do not employ the best people in the FSA you will---
Q222 Mr Walker: But we clearly have not employed the best people in the FSA. This is the concern. We are told we have to pay these sums of money to employ the best people, as you said to the Chairman, but it is obvious to any outside observer that we have not. We could have had this disaster paying someone £65,000, to be perfectly honest. Where does it end? Shall we pay the next Chief Executive of the FSA £6 million, or £60 million or £3 million? You can see the concerns.
Mr Melville-Ross: I understand your concern. I do not feel that I am in a position to offer a solution, other than to make the point that it is a very complex organisation. For goodness' sake, do not encourage the organisation to pay less for talent right now because it really needs that talent to go through the process of reform that Lord Turner has suggested.
Q223 Mr Walker: A final question: what is the definition of talent? We were told we had very talented people, for example, running the banking sector. This is why they were paid £20 million. Their talent was to ultimately rack up debt, buy duff financial instruments and destroy the financial services sector. So really, there is not a link between remuneration and talent.
Mr Melville-Ross: There probably is not. My definition of talent would be that it has two ingredients: one is intellect - these issues are complex and the individuals concerned really do need to be very bright to understand what is going on.
Q224 Mr Walker: But they did not; they did not understand what was in the packages.
Mr Melville-Ross: Partly that, but partly the wrong judgements were made as well. That is my other ingredient. Everybody around this table knows perfectly well how difficult it is to judge the judgement of another individual, and the past is no necessary guide to the future, although, interestingly, if you look into the research about the most effective ways of identifying the right kind of talent, past experience is the best guide that you will get but clearly, the process we have just been through internationally is an experience that nobody has ever been through before.
Q225 Mr
Walker: I am being a bit cheeky here. Boots taking on Mr Hornby of
Mr Melville-Ross: It must do. They have made a judgement and all I can offer is that people learn from these mistakes. That is what is going on.
Q226 Mr Prentice: I want to ask Millie Banerjee about Royal Mail. You know something about the Royal Mail because you used to be Chair of Postwatch. Adam Crozier gets over £3 million a year, I think, including about £2 million, I read, under the company's long-term incentive plan. I have a cutting from the Guardian in front of me from 2008 and you are quoted. You were talking about a particularly difficult period in the Royal Mail when, you told the Guardian, "Customer expectations were definitely not exceeded -indeed, were not met." That was you as the Chair of Postwatch. What happened to Adam Crozier's salary and package? Was that poor performance reflected in a reduction in bonuses or any diminution in his salary package? I ask you because you were intimately involved in this and you will be able to tell me.
Ms Banerjee: I am not intimately and I was not intimately involved in setting Mr Crozier's salary or anybody else's salary in Royal Mail and reviewing the package and understanding what they were being paid for, but I was the Chairman of the organisation that was set up to review consumer service in the postal sector. My observation would be that Royal Mail is a very difficult and complex organisation to run. It is very difficult, and the difficulty stems from the fact that it has not invested in transformation of the business for 15 or 20 years, to be honest with you. The nature of the job, to transform the business, is quite special. My observation, which you read out - and I still believe that, having left that organisation - is that the consumers in Royal Mail do not get the best deal that they are likely to get, and that is because of a combination of factors, which are to do with the way the organisation is structured, the lack of investment in the organisation, the fact that there is not really very effective competition in the residential sector, and the whole nature of things. I personally believe that Royal Mail needs to change, if that is the question.
Q227 Mr Prentice: I do not want to take us down a blind alley and the Chairman will not let me but my question is a very simple one. The UCW and the other people would say Crozier has got £700 million from the Government to modernise the Royal Mail and he has been sitting on this money. It has not been spent. The simple question is this: if an organisation is performing inadequately, performing poorly, surely that should be reflected in the remuneration package of the person at the top, and in the case of Royal Mail it has not been reflected?
Ms Banerjee: In principle, that must be true. Taking you back to the Ofcom experience that I have, we look very carefully at how we are performing, not just from our internal results but we look at what our stakeholders say about us and that is taken into account. In principle, you have to be right that an organisation does have to reflect in its salary structure, in its benefit structure, its performance and the way its performance is perceived by the people that it is performing for. In principle, that must be right.
Q228 Julie Morgan: Very quickly, I wanted to ask about pay for board members in the public sector and what you think about the levels of pay that are given and whether that restricts the type of person who actually is on those boards. Tim Melville-Ross, I do not think you take anything, do you, in your role?
Mr Melville-Ross: That is correct, yes.
Q229 Julie Morgan: Could you give me your views swiftly on this, please?
Ms Banerjee: Yes. I do get paid.
Mr Melville-Ross: Sorry, do you mind if I interrupt? I choose not to take a salary. There is a fee of £46,000 payable to the Chair of the Higher Education Funding Council because it is a two-day-a-week role. Because I am well remunerated for many of the other things I do, I choose to give it to charity but you must not infer from that that it is not necessary to pay people to carry out public service like this. My own personal circumstance is such that I am prepared to do that. I used to chair Investors In People, which did not carry a fee. The problem with not paying a fee is that, by definition, you limit the pool of talent in which you can fish. So in principle I do favour board members of NDPBs, public bodies generally, being paid. The difficult question then is at what level. I would certainly not advocate anything like private-sector levels. £46,000 is a great deal less than a private sector chairman of any substantial organisation would receive, and the £5,000 fee which is paid to individual board members is likewise much less than you would see in the private sector. There is that argument about having the opportunity to draw talent from a wider pool. There is also one final point - and I am sorry to interrupt - that I remember as a Chief Executive once my Chair was not paid and that had the effect of discouraging me from making full use of the Chairman, or it might have done; he was not the kind of individual who would be ungenerous with his time but there is a sense that if someone is doing a job over a period of time, they should be paid for it.
Ms Banerjee: I would very much support much of what Tim has said. I think you framed your question around recruitment problems. Our experience in Ofcom is that actually pay has not been a problem. We pay our people adequately. We have a variety of governance structures, not just a board; we have an advisory committee and so on. There is a structure of packages. The main difficulty is around, in our case, because we are a regulator, conflict of interest. We have to find people who understand the environment that we regulate, but we cannot have them coming into Ofcom very soon after they have come out of that industry because we would then have potentially a conflict of interests. That has been our main problem in recruitment, not pay. Most of the people we have on our Board would earn a lot more on a daily rate than what Ofcom is able to pay. I myself earned last year something like £56,000 for two and a bit days in Ofcom but I do other things and I work virtually full-time. Most people do the job because they want to do it as a non-executive, not because they are going to get rich from it.
Dr Wright: I have a variety of roles, and this constitutes my main income, apart from a teacher's pension. I have a salary for the Lottery Commission, which I think was just over £60,000 last year. It is important to say that that is calibrated against an equivalent per diem rate and it is for 9.5 days input a month. I think that is quite a considerable amount. During the period we have looked at however it was important to be able to give, if necessary, 18 days a month to that because of the nature of the competition. I think that was a good way of looking at that. However, the commissioners are paid on a daily rate, which I think is currently £284 per day. There are differences, not just in the way people are paid, salary or per diem, but also in relation to the kind of input. For example, on the pay review bodies the members are paid, I think, £300 per day and Chair £350 per day, and that is in relation to activities, meetings and visits. So there are differences. I have had previous jobs in the past. I was a Board member of English Partnerships, which paid a salary of £12,000 for three days a month. So there is a variety. For me, I would say I think there are two points I have come to a conclusion on over 20 years' experience of these kinds of bodies, some remunerated and some not. I think that where bodies are delivering - and I know we have talked about whether it is an easy job - they have big challenges; we oversee the running of the lottery, the return of money to good causes, £1.2 billion a year, which we account for to the nearest penny, for example. I think it is important for accountability of Chairs that it is recognised that it is a serious job and that it is remunerated appropriately. I think it is important to do that. That is one point. The second point has already been made. We do want greater diversity in our public bodies. I think we are seeing more of that, right across age, background, ethnicity, and so on, and particularly people from small businesses, for example, at an earlier stage in their career. Sometimes it can be very difficult for people to make a contribution as fully as they would like to in public service if there is not an appropriate level of remuneration. So I think it is valuable for those bodies to be remunerated. It is important, of course, to get it right. We would want to bear in mind that for a great many public bodies, for example, across the DCMS which is the sponsor Department for the Lottery Commission, these are trusts and people are not remunerated; they fulfil the role of trustees.
Q230 Julie Morgan: One thing that does strike me is that people tend to collect positions and have more than one in the public sector. I am always a bit curious about that.
Dr Wright: May I answer that? I have had a career as an executive and chief executive and vice-chancellor indeed, and have moved on from that to this next stage of my career. I regard it as a privilege but also I think I can make a contribution to more than one public body, because you can bring some experience across the piece, as we have been talking about this morning. For me, this is something which I take seriously as a role, and indeed chairing a public body I think is a particular privilege and a particular task. One finds that one can bring that experience to bear.
Ms Banerjee: I just wanted to add to what Dr Wright was saying that when I apply for a job, I consider very carefully what skills I can bring and I do it when I think I can make a contribution and transfer my skills. For instance, I have just joined as a board member a primary care trust in Newham in London and, after discussion with them, it seemed to me that I could bring something to them around customer care, consumer care, patient care, how to manage that, how to manage the front end of it. I do it because I think I could bring some skills and, as Anne says, it is a privilege to be able to do that at my age, because I have gone past the executive life and I have a different kind of life now.
Mr Melville-Ross: One very quick point as tailpiece to this discussion. The interesting thing about being involved in several different organisations - and I chair HEFCE, an engineering company, an insurance company and a real estate company - they could not be more different but the issues that come up in the boardroom are very similar, and being able to draw on experience from private and public sector, different industries and so on, I find invaluable, so my colleagues tell me.
Q231 Paul Flynn: We have been given the general impression from this morning's session that all is right with the world, and it is not all right with the world. If somebody is a social worker, they have to take judgements, life or death decisions, on a daily basis, very difficult judgements, but earning £20,000, £25,000 a year, and the gap between their pay and the people you are talking about is getting greater all the time; the gulf between people on average pay and on top pay grows wider. I can understand that Beethoven and Shakespeare are unique. I find it very difficult to have someone sitting behind a desk taking the decisions you describe, Ms Banerjee, eyeballing the public sector and all these other decisions. Do you really believe that someone getting these top salaries is really 20 or 30 times more valuable or doing work that is 20 or 30 times more beneficial than anyone else, or is it just a question that these people who get the top salaries have a special talent for inflating their own salaries?
Mr Melville-Ross: Forgive me. You should not infer from what we have said, and indeed what we have not said, that all is well with the world. I certainly do not think it is and I have not said that. We have to deal with the world as we find it and apply as much logic as we can. You were talking earlier about something I said when I left the IOD, and I am concerned about the level of reward. I think it is disproportionate in the private sector. I am much less worried about the public sector because at least there is a greater degree of rationality. You can argue that it is still not fair but these things are hugely difficult to judge. Please do not attribute the words "all is well with the world" in terms of pay at senior level to me. I do not believe it is.
Ms Banerjee: I would never suggest that all is well with the world. One might need to think about whether social workers are appropriately paid for the risks they take. I am not in a position to comment on that but, in terms of life and death salary, we regulate a £50 million industry which is absolutely fundamental to the citizens of this world and fundamental to the way the economy is run. Those are important and complex jobs and they have to be remunerated appropriately if we are going to manage to keep the health of the industry in the way we would like to.
Dr Wright: May I answer quickly also, if I may? It is a very important question. We obviously need to consider whether pay levels are right, right across the piece. As far as the Lottery Commission is concerned, we are mainly professional staff. Our lowest paid member of staff is on £20,000 but the average is about £38,000. The Chief Executive, as you heard, is on £106,000, so it is not a huge ratio. In terms of decisions, I can give an example of one decision that the Commission, led by the Chief Executive with ourselves, had to make and that was a decision on the award of a licence to Camelot for the next period and, as we said in public, the outcome of that will be that we estimate that there will be increased returns for good causes of between £60 million and £100 million per annum for the period of the licence at regular sales levels. That is an example where there is a real impact of a decision.
Q232 Chairman: Tim, you talked about the disproportionate levels in the private sector but is it not the truth, and the reason for looking at this kind of issue now, is that what has happened is that the disproportionate private sector salaries have run off into the public sector; there has been this inflation that has carried across into the public sector, for the reasons that Millie gives, because you say in the last 10 years or so much of government has been hived off, has been put into market-facing situations, and in doing that, the argument appears that therefore we have to market-facing salaries.
Ms Banerjee: Chairman, I said repeatedly that, certainly in Ofcom's experience, we cannot afford to pay market-facing salaries. We do not pay market-facing salaries.
Q233 Chairman: No, but you say you have to get into that area because of the work that you are doing.
Ms Banerjee: No, we have to take into account what a very talented individual, who has to run an organisation like Ofcom, could actually generate in terms of his package for his lifetime and we have to find a way of making the package attractive to him, and part of it is the benefit package but part of it is that many people come to work in Ofcom because that is where they want to be. They want to make a contribution to the citizens of the world, they want to make a contribution to the public sector, so it is a package. If we were able to pay market salaries, we would be paying a lot more but that is not what we want to do.
Chairman: We have had a good run through the issues. I hope there is nothing you wanted to say to us that you have not had a chance to say. For us, it has given us a good flavour of the kind of context in which organisations like yours, of a varied kind, are having to take these decisions about remuneration. We are very grateful to you for coming along and talking to us about that. Thank you very much indeed.
Witnesses: Mr Bill Cockburn, Chairman, Mr Mike Langley, Member, and Mr Keith Masson, Director of Secretariat, Senior Salaries Review Body, gave evidence.
Q234 Chairman: Let us move into the second half and welcome our witnesses, Bill Cockburn, Mike Langley and Keith Masson, all from the Senior Salaries Review Body. We are grateful to you for coming along and helping us with our inquiries. You know what we are about. Do you want to say anything to us by way of introduction?
Mr Cockburn: A couple of points, if I may, Chairman. First of all, the Senior Salaries Review Body has been going for nearly 40 years, and the principal groups that we look at are the Senior Civil Service, the judiciary, the senior military and the senior National Health Service managers, and from time to time we have the joy of looking at MPs' and Lords' remuneration expenses. We help the devolved assemblies with their salaries, if they invite us to do so. We look at them individually, not as an amorphous mass, and we have sub-committees with the SSRB that look at these various groupings, because they are different, but we can bring that out in discussion.
Q235 Chairman: The key question, which is the one that came up in the previous session, is here we have SSRB doing this work in certain defined areas but not doing it across the wider public sector, and the question, obviously, on the table is would it make sense to have, if not the SSRB, somebody doing a wider exercise, at least at the level of principle and approach across the wider public sector? What would be your take on that?
Mr Cockburn: We represent about 8,000 people across these various groupings that are mentioned, which is a small number in relation to the vast employment in the areas that they represent and the costs that they incur. Generally speaking, we come in when we are invited to do so. Broadly speaking, the groups we represent are not subject to collective pay bargaining, as it is for other people. So, in the absence of pay bargaining, having a body like ours, which is independent of government, which is evidence-based, which is regarded, generally speaking, as fair and objective in the way that we do our things, gives faith to those that rely on us for their remuneration and is fair to employers, who reckon that what we recommend is fairly based. As to whether you extend the system, you could do. For example, taking the most senior National Health Service managers is a recent addition to our group. So we are available and we have the skills to do so, but there are other processes for determining pay elsewhere. I would say, finally, I do not think we would be well placed to be deciding on the pay of individuals, say, like local authority chief executives. We are, I think, better placed to take a group of people and determine pay scales for them.
Mr Langley: I think that is right. Essentially we look after homogenous groups of employees. You heard from the three people who were represented here this morning. They are not only different individuals but they have different skills, and they have different pay markets, and we have, in a sense, homogeneous pay markets across the piece of those.
Q236 Chairman: So if someone came along with a proposition that chief executives across a range of public bodies should have their salaries advised on by the SSRB or a similar body, you would find that a too daunting prospect, would you, because of the complexity of the different markets?
Mr Langley: Yes, I think it would be too difficult, too disparate a field.
Q237 Chairman: How, then, are we to get to grips with the underlying issue of, as it were, what is happening to top pay in the public sector generally? We have got a partial answer through the SSRB system in those areas, but we have not got an answer in this wider sector. Do we say it is too difficult, we cannot do it, or find another mechanism for doing it?
Mr Cockburn: I do not think we would say it is too difficult. We have not been asked to do so. In these other cases they probably have
remuneration committees that are set up to do it, whereas for the groups that
we represent, generally speaking, there are not remuneration committees. In some cases there are in the Health Service,
and they are guided by what we say.
I guess it is for the employers to decide what is best in their
circumstances. We are not resistant to
this; we are here to respond. For
example, the permanent secretaries in
Q238 Mr Burrowes: I am sure you do an admirable job, but would you reflect on the fact that, effectively, your job is limited and, in many ways, toothless in terms of your independent recommendations often going the way of a political whim and not being followed through and not being enforced? Firstly, in terms of limited, would you reflect perhaps on those that came to give evidence earlier today that in many ways the role they play, in terms of public pay, is the fox guarding the chicken coup: it is hard to resist not taking the most you can when the gate is wide open? Effectively, that is what many of them are doing as chairmen of their remuneration committees, and the call overseas, as well as perhaps here, is for a ramped up role that you could play with greater authority, almost a public pay Tsar coming before us with a clear mandate to police cost, to contain them and perhaps quite radically to look to reduce costs as well? Would you want to look for a way that you can have much more teeth in terms of the enforcement of your recommendations and, in terms of those recommendations to ministers, when they are not following through a way that they would be much more mandated to accept your recommendations?
Mr Cockburn: I would not accept that we are as toothless as you suggest. It is true that our reports are recommendations to the Government, and it is always up to the Government to decide whether or not to accept our recommendations. However, our reports are public and the Government, if they turn them down (which they do not do very often) then, to Parliament, would explain why it is that they have done this. They tend to be harder on their own pay rather than on the pay elsewhere. If we look over the history, say, since 1997, the Government have only rejected our pay recommendations once, and that was actually the last one in 2009. There are special circumstances, and actually the Government reduced the pay award to below the level that they had recommended to us that we follow. In all other cases through the years, they have either accepted, without question, what we have done or, on occasions, they have staged the awards. They have done that on a number of occasions and they have explained why they have done this, but, generally speaking, there is a pre-disposition to accept what we say.
Q239 Mr Burrowes: Have you ever felt under any political pressure?
Mr Cockburn: No. We are an evidence-based body, so the Government give us economic evidence. All the other consultees give us their evidence in writing and they appear before us, as well, orally. There are ten of us on the body. We consider all the evidence and we then make our recommendations and publish them, and there is great transparency.
Q240 Mr Burrowes: Those are made in draft form, first of all.
Mr Cockburn: We do not clear the report. We do not negotiate the report with government before it is issued.
Q241 Mr Burrowes: There is no communication that can lead in any way to a change of recommendation.
Mr Cockburn: The only situation is a factual check of some of the things that we have said with officials, not with senior ministers. Ministers have no role in this. The civil servants will check that what we have said in evidence is factually correct but, having said that, our recommendations are our own, they are transparent and we are accountable for them.
Q242 Mr Burrowes: On a separate point, is there not confusion of you being able to make recommendations, for example, in the National Health Service for primary care trust chairmen but not for NHS trust chairmen? Is that not a confusion that needs to be remedied?
Mr Langley: I think the answer to that is, yes. This is a remit we got in September, 12, 24 months ago, to look at the senior managers in the Health Service, but it was a very specific remit. It only covered primary care trusts, special heath authorities and strategic heath authorities, it did not cover foundation trusts or acute trusts, and that, clearly, is a difficulty for us because, particularly when we get evidence from the senior managers themselves, they say, "You are looking after our pay, but what about the pay of people in jobs which we might compete for, or might like to come from, which are not controlled?" We find that a bit of a difficulty, but that is our remit. We were not given the remit by the Government or by the Minister of Health for the other trusts, and we cannot argue about that.
Q243 Mr Prentice: Do you think pay in foundation trusts, those parts of the Health Service that are not regulated or supervised by you, has gone out of kilter? Are chief executives in foundation trusts getting paid too much, as far as you are concerned, and does it have a knock-on effect on the regulated part of the NHS, that people in those areas that you look at are just drifting over to the foundation trusts where salaries are set by their own remuneration bodies?
Mr Langley: I think there is a value judgment in too much. If you are asking me, "Are they getting paid more?", the answer is, "Yes, they are." Because the pay is set independently by remuneration committees on foundation trusts and they have control of their own budget, therefore their own pay budget, they are able to pay salaries which have been higher than have typically been paid to National Health Service managers. If the pay is drifting upwards for the foundations trusts, the issue then is how do the bodies that we look after retain, attract and recruit people who might otherwise go into these other jobs? If the pay differential is too much, then we are going to lose them.
Q244 Mr Prentice: Is it too wide at the moment?
Mr Langley: It varies, is the answer, because foundation trusts, coming back to the previous question, are set individually by individual trusts. There is some data, but it depends on the size of them.
Q245 Mr Prentice: You spend your entire life looking at these things. You must be monitoring what is happening in the foundation trust sector.
Mr Cockburn: Mr Prentice, maybe I could add, up to now we have not seen evidence of a great drift from the bodies we represent into the foundation trusts. The Department of Health, of course, look at this and they give us evidence, and they have said to us that they are content to have the foundation trusts outside this and the other bodies with us. There was a worry, in theory, that you would get a tremendous drift, or brain-drain, from one to the other, but that does not appear to have come through in evidence yet. This is something that needs to be kept an eye on, but up to now it has not caused an obstruction, as it were.
Q246 Mr Prentice: Would you like to see all NHS organisations brought under your umbrella, leaving all the politics of foundation trusts and all that to one side, just as a way of regulating things more coherently, I suppose? We are talking about one organisation, the National Health Service, with lots of different families, but it is the same health body. Why cannot they all be under your umbrella? Do you think they should be under your umbrella?
Mr Cockburn: First of all, if you take the groups that we looked at, I can see an argument for saying should all the public sector be under one great body which pontificates on what the rate should be overall.
Q247 Mr Prentice: I am asking about the NHS, not all.
Mr Cockburn: Right. The argument might have some similarity. Taking our groups, even with our groups, which do not represent the whole of the public sector, we have taken the view that it still makes sense to break them up into discrete groups and have sub-committees looking at them, because they are different: the market considerations are different; there are different skills and expertise needed. You have got fundamental differences, like the senior military. As they recruit exclusively from their own ranks, one has to make sure that there is not a distortion in the pay lower down, because you would not be able to resource the generals and the admirals and the air-marshals. So you have to make sure that the pay overall is sufficiently healthy to attract and retain people of the skills and leadership needed to do these extraordinarily difficult jobs. So it is also in the judiciary. That is why we need to look at them. You cannot apply a simplistic, across the board value judgment to them. Equally, in the Health Service, which is colossal, the Health Service is bigger than all the rest put together, therefore, within that there may be, and certainly the health department tell us that there are, differences and you have to fine tune these.
Q248 Mr Prentice: I was not entirely convinced by that answer.
Mr Langley: I think your premise to take the politics out of it is difficult to accept. You cannot. There are politics in deciding whether foundation trusts should sit on their own in terms of determining their own remuneration.
Q249 Mr Prentice: I am just inviting you to get above the politics.
Mr Cockburn: We have the capability to do it.
Mr Langley: If that were possible, it would certainly be, simply because if you look at the rest of the National Health Service, as you imply, they have common base counts and all the agenda for change and the nurses and the doctors.
Q250 Mr Prentice: Where we are, all hospital trusts are on the way to becoming foundation trusts - that is, across the NHS. We are talking about hundreds of thousands of people employed by foundation trusts, and each foundation trusts will be able to set the pay of their so-called top people.
Mr Langley: Yes.
Q251 Mr Prentice: The whole pay system in the National Health Service is deliberately being fractured and atomised by the Government as a deliberate act of policy. It is not just one little bit of the Health Service; this is happening across the Health Service. All I am asking you, I suppose, as I asked the people we had before the committee last week, is whether that is a better model than the one that you currently operate. Is it a better model to have each hospital trust setting their pay for the top people, so-called, rather than you?
Mr Cockburn: I think what we say is we have the capability to do
that, I believe, and it is not for us to dictate how pay should be determined. We are here and we are open to invitations to
do these things, and we apply our skills to doing it. For example, in Northern Ireland we have
undertaken a major reorganisation of the Health Service and they have invited
us (and they were not obliged to do so) to look at the pay structure of all the
top most senior people in the Health Service, and, in fact, we have just
completed the assignment, under Mike's chairmanship, and we are about to
publish our report. Here is a good
example of the
Q252 David Heyes: There was a time when we all believed that job evaluation was the solution to these kinds of difficulties. I guess, from what you have said so far, they are still very much central to your approach.
Mr Cockburn: We have a number of evidential sources: the departments, the people that are represented, and we take written evidence, oral evidence, we meet groups of people, so we take their views. We also, on occasion, hire consultants to provide specialist support, whether it is job evaluation, whether it is pension, actuarial expertise if we are doing a review of pensions, as we are doing for MPs right now, and so we do use this. It is not mechanistic. We take it into account and we weigh the arguments along with everybody else. None of that stuff is a precise science, there are different points of view, but it can be quite good guidance to us in forming a view as to the relative importance of some jobs as against others.
Q253 David Heyes: That was a feature of your approach to the NHS review that you conducted recently. It was job evaluation based, was it not?
Mr Langley: What we said in our comments of the NHS senior managers was that there was no correlation between pay and job size. If you look at the structure of how the very senior managers in the National Health Service are paid in their remit group, the directors who report to the chief executive are paid a percentage of his or her salary, and there were some various bands between 55 and 75% attached to job titles, but there was no reference to the size of the job in relation to the job title. The individuals who we took evidence from said, "My job is bigger than that job over there, and yet I am paid the same", and there was no evidence to say whether that was right or wrong. What we said was we thought there ought to be some job sizing within the NHS senior managers to determine whether they were correct or not, and the Department of Health recommended an independent review by a guy called Alan Wright, who accepted that job evaluation, some sort of job sizing, was necessary and the Department of Health accepted that evidence and recommendation and they are going to do that next year.
Q254 David Heyes: That seems to me to be a very sensible approach to these problems, that kind of flexible attitude to it, which brings me back to a point that has been made several times now. Why not possibly broaden the remit of the SSRB or create a similar body that has a wider remit right across the public sector: because it could bring this kind of intelligence and pragmatism to advising each individual foundation trust, in the case of the NHS, on how they should be benchmarking?
Mr Langley: It is actually that, in that if you have a coherent body that deals with pay across the piece, then you are going to have a coherent pay structure. If you are going to have disparate bodies, you are going to have disparate structures, which is back to your point.
Q255 David Heyes: That is a vote in favour. What is it a vote in favour of? Broadening your remit or creating a new body that will address these wider issues?
Mr Cockburn: I just repeat that I think it is a real option. I think you have a body that has got the capabilities and the experience over a long period of time in doing this kind of thing, but I think it is for others to say, given that there are other options, what is the best option for their circumstances.
Q256 David Heyes: You are very cautious about promoting your organisation and what it does. You have given us a very helpful written piece of evidence. It really is interesting and constructive. You are very modest.
Mr Cockburn: We are very modest.
Q257 David Heyes: It is not for the SSRB to judge whether its evidence produced the right results. In several places you say, "It is for others to judge us." Come on, this is your opportunity to promote yourself.
Mr Cockburn: I think our track record is quite good. Maybe I can clarify a point I made earlier about whether our recommendations are recommendations that others can accept. There is one exception to this, and that is on MPs' pay. It has already been decided that our body actually determines what the annual increase in MPs' pay is. A resolution of the House was passed last year. We calculate the increase by reference to 15 other bodies that we look at, and we then notify the Speaker of what the increase is. There is no discussion, there is no debate in Parliament and there is no voting. There is an example, I think, where we can actually be trusted to do something about this. In the first year of a new Parliament we would undertake a more fundamental review of MPs' pay again on the same basis I have just described, and, thereafter, there would be annual up-rating for the remainder of that Parliament. There was a change in the circumstance where it has become, if you like, a little bit more executive than advisory.
Mr Langley: One of our recommendations they did accept.
Q258 Mr Prentice: Were you aware of all the expenses and allowances that MPs were charging?
Mr Cockburn: Indeed, we were, and we have made some feisty recommendations in the past which the House have chosen not to follow. In the past there has been a cherry-picking of some of the things that we have said and a rejection of some of the reforms that we recommended.
Q259 Mr Prentice: This is an issue which is radioactive, if you understand.
Mr Cockburn: Indeed.
Q260 Mr Prentice: But you would like to see a situation where you, or the Kelly Committee, would just look at MPs' remuneration in the round and that MPs should just accept it?
Mr Cockburn: Of course, you have the sovereign power to do anything, so you could always take it back if you were not satisfied, but I think what we have said is that when it comes to remuneration matters, say in determining pay, the pensions (in consultation with the pension trustees), the rate (whatever is the new expenses regime), insofar as maybe from time to time they need to be priced and up-rated, our body would be well placed to do something like that. I think that we are standing ready with some past experience to help constructively with the reforms that we know you are most anxious to have introduced.
Q261 Chairman: Some people are arguing that the allowance issue somehow has to be compressed into the pay issue. Surely the pay issue and the allowance issue are just separate issues?
Mr Cockburn: I think they are separate issues. Yes, they are; absolutely. We have said in the past on MPs' pay (and it is almost politically very difficult to increase it, as we have found over the years), in our view, MPs' pay is 10 to 15% lower than it should be.
Q262 Mr Prentice: Could you repeat that please!
Mr Cockburn: It has been 10 to 15% lower, in our view, and we have said that in our reports. Indeed, in our past two reports we recommended increases of £650 a year on top of the other increases, which the MPs rejected. There is a degree of under payment, in our view, but it is always going to be difficult to address this under the present arrangement.
Chairman: We want to be nice to you, of course, but let us resist the temptation to go further down that route.
Q263 Julie Morgan: I was interested in your body. It is made up of ten people, is it?
Mr Cockburn: There are ten of us who are members.
Q264 Julie Morgan: What sort of range of experience and diversity do those ten have?
Mr Cockburn: Mike has long experience of senior remuneration management and advice in the private sector. We have professors who are labour economists; we have businessmen, people who have been HR directors in companies. I have been the chief executive in a number of companies. It is a good mix of skills and expertise coming together.
Q265 Julie Morgan: Are there any women?
Mr Cockburn: Actually, we do not have any women currently. We had two, and they came to the end of their term. We have a very open process of recruitment, supervised by the Civil Service Commissioner, who is a woman. It happened in this case that they were all men who were successful. It was not our choice; that was the way it came out. This is a meritocracy.
Q266 Julie Morgan: In terms of the way you make decisions, do you often have disagreements within the decision-making process where you would strongly disagree about what you are going to recommend?
Mr Langley: We have had robust discussions.
Mr Cockburn: Yes, vigorously. We have not ever had to take it to a vote. We have not had a minority report. We have managed to try to get a consensus, and we work hard to get that. We listen very carefully to all the points that are made and they are different but, in the end, I think there is a general acceptance that what is important is to produce a report at the end of the day which is published, it is a Command Paper laid before Parliament, and really we have a duty to come up with a set of proposals that are soundly based, evidence-based and well argued, and that is what we have tried to do over the years.
Q267 Paul Flynn: There are 194 public workers who receive higher
salaries than the Prime Minister. In
Mr Cockburn: Yes, that is something that, in fact, we have
commented on in the past. I think it is
fair to say that the political world seems to be subject to its own salary
discount by virtue of what you do. For
example, we looked at how the Prime Minister's salary and MPs' salaries compare
with other countries and we produced this.
In fact, you do very well by international comparisons, and when we
looked at this, the Prime Minister's pay was second only to the President of
the
Q268 Paul Flynn: This is an argument that goes back to the time of Plato about the guardians. These people who are taking these decisions should have the public interests at heart, but the position now is we have created a situation where people taking jobs as top civil servants, generals, admirals, prime ministers, ministers, are in such a position that their retirement job - their job when they leave the service - is likely to be more attractive to them than the job they are actually doing in what should be the top jobs. There is a grave danger that they can distort their decision-making in order to feather their nest for a future retirement job, and they could be taking the wrong decisions while they are taking those jobs. Does it not distort the whole idea of having people in these top salaries who should be disinterested from their personal salaries and certainly free from any temptation to take decisions that are going to give them rewards for the future?
Mr Langley: The answer to that hypothesis is you should pay them a lot more so they do not need to take those amounts of money when they retire, like Tim Melville-Ross, who said he does not need to be paid as Chairman of his education trust because he has earned lots of money in the private sector.
Q269 Paul Flynn: I know what the position was before, but I think it is unique. There are nearly 200 people who are earning more than the Prime Minister. The Prime Minister's should surely be the top salary.
Mr Langley: Yes, but I think this comes to the heart of one of the issues. It is about pay markets, and what we are looking at is evidence of how you attract and retain people. There is a market for MPs, people in Parliament, which is hierarchical, in terms of salary, starting with an MP and moving up through a committee chairman, minister and then to the Prime Minister, and the issue about MPs' pay is how can you attract the right people to come and do the job? Well, give them the right sort of salary for that. If you look at judges, for example, the pay market for judges: they are senior lawyers, barristers and solicitors, many of whom earn a million pounds a year; so there are different pay markets. The military has its own pay market. As we discussed earlier, the NHS has a disparate pay market.
Q270 Paul Flynn: In the military, the less risk you have the greater your salary. The further you go up the pay scale in the military, the less likely you are to be killed on the battle field. There does seem to be a distinction there.
Mr Cockburn: Try and tell that to the two and three stars who come before us.
Q271 Paul Flynn: I would be delighted to.
Mr Cockburn: Can I make a general point about our approach to pay? I have explained how we get various sources of evidence and so on but, I think, when it comes to the point, our approach to pay is to pay at the lower end of what would be justified and, in fact, our view is to pay the minimum necessary to get people of the right quality in a sustainable position. Having regard to recruitment and retention, these are the key indicators that we look at in forming a view at the end of the day; so we do not consciously set out to pay a premium. In some cases there are premium payments made where, notwithstanding the pay ranges that we recommend, the Civil Service might go and recruit somebody with particular skills and pay them a much higher salary. For example, in the Olympics, the team that are managing the top Olympics programme are paid well ahead of the going rates, but there is a special case for this because you are looking for people of outstanding ability and expertise to do this. Outside our normal recruitment there is scope for going into the market and paying a premium.
Q272 Paul Flynn: Is there evidence that these stratospheric salaries produce better outcomes in the decisions that they make? We had a striking example in the financial services sector from Charles Walker, and there are many other examples, but is there real proof there that the more you pay the better decisions you will have?
Mr Cockburn: Of course those who employ them have to take that view. If you take the Civil Service (and I will come on to the incentive schemes), there are for these people sometimes very specific objectives and targets that they have to achieve to justify their recruitment for the kind of jobs they are in. We have been quite vocal, in general, about looking carefully at the number of times the Civil Service find the need to go outside the pay systems and recruit more highly paid people. This is a big issue currently, the dual market, if you like, and certainly a lot of civil servants internally, who have come up through the system, are unhappy with the fact that there are other people coming from outside into senior positions who get paid a lot more, and we have challenged this and we have pushed hard to say that this has got to be objective-based, it has got to be evidence-based, it has got to be transparent. In fact we track it and we push the Cabinet Secretary when he comes to see us, and we are very glad to see in the Normington review of the Senior Civil Service there is an acceptance that there has got to be greater rigor and transparency there and there has got to be greater fairness in treating the internal applicant for a job more equally than the external applicant for the same job. In the past it was rather biased. We have been pushing. We are not saying everybody should be paid at the high level, because there has always got to be scope for going to the outside market and paying the premium rates, but in doing so it has got to be fair, transparent and objectively based.
Mr Langley: To answer your question precisely, nobody makes bad decisions because they are badly paid. They leave if they are badly paid.
Chairman: Good point.
Q273 Kelvin
Mr Cockburn: We are unashamedly in support of incentive performance bonuses. We support it through our own background of having seen it work and, also, the concept of having a higher proportion of variable pay which is performance-based, we think, is a good situation, as a general statement. Having said that, we think that there is considerable scope for improvement in the way things are organised. Bonuses for the senior civil servants, on average last year were 8.6%, and these are awarded according to the appraisals and assessments of the individuals, and they range from nothing to 15%, roughly, which would be a top award, but within the average of the 8.6. We have urged the Cabinet Secretary and his team to make sure that they can improve the quality and rigor of the system that gives rise to these payments, and, indeed, in our last report we did not recommend an increase in the bonus pot for the year ahead, 2009, so it remains at 8.6. Although, in principle, the Government's intention is that that should rise to 10% on average by 2011 but, actually, there was no increase last year. For the permanent secretaries, they have the same bonus scheme of 8.6%, and we make awards on an individual permanent secretary basis according to their performance, and that is backed up by evidence but, as I mentioned earlier, the permanent secretaries this year have waived their bonuses in respect of last year in recognition of the current position that we are in.
Q274 Kelvin
Mr Cockburn: People have different points of view, in general. There is a lot of support for this, and certainly it was put to us in evidence and backed up by the Normington Review, that the principle of performance-related pay is a good one and one, in fact, that they want to introduce further. In fact, not only are there the bonus arrangements within the Civil Service, which by private sector standards are quite modest, to be honest the average bonus payments for the Civil Service was something like six and a half thousand, whereas the average in the private sector was 35,000. There is quite a big spread of payments there. That is the reality, but the intention is to make it more rigorous, to make it more meaningful, and not only is the bonus subject to performance but the basic pay itself is performance-based. Just to explain, in the Civil Service there are four categories of performance, and people are allocated to these four categories: the bottom category, which has got five to ten% in it, do not get any pay increase and the higher ends would get more. So even the base pay is related to performance, all within the average pay budget, which we determine overall.
Q275 Kelvin
Mr Langley: There are various jobs at that sort of level that get piece rates and get bonuses for productivity, and all sorts of other things like that which are very similar, but I think actually the issue about bonuses is how is the objective setting done? What is the bonus for? What are you trying to achieve with it? If you have a bonus structure, does it actually achieve those things which you are seeking? That comes down to a lot of work needs to be put into objective setting.
Q276 Kelvin
Mr Langley: If the bonus is narrow enough just to look at financial objectives, you are absolutely right.
Q277 Chairman: Have you thought about applying the principle of performance-related pay to Members of Parliament? If you are unashamed enthusiasts for it, why not apply to it MPs as well?
Mr Cockburn: There may be some circumstances where it is not appropriate. For example, if you take the judiciary, there is a strong view and we are persuaded that that would not be an appropriate world to have performance-related pay, simply because, I think, there is a feeling that it might give rise to behaviours that would be inappropriate. Certainly there is a very strong feeling about it. That is not to say that there should not be targets for efficiency in back office activities, and so on, but the judges themselves, I think, feel very strongly that this is not appropriate. Although we have a general enthusiasm for it, there may be differences.
Q278 Chairman: What about differential pay? A lot of MPs have other jobs as well. Why not have different pay bands: those who are full-time, those who are part-time?
Mr Cockburn: I would agree with you that this is a reasonable thing to do. For example, if you are a Member of Parliament and you are a member of the Northern Ireland Assembly, for example, your Assembly pay is abated by two-thirds, so there is already a principle of abatement if you are in receipt of an MP's pay or Assembly Member's pay. It might be that that sort of concept might have a further potential.
Q279 Mr Prentice: Do the people at the very top of organisations necessarily have the most difficult jobs? I was interested in what you were saying earlier about job sizing. A few years ago, when Andrew Turnbull was Cabinet Secretary and head of the Home Civil Service, I asked him, "What do you run?", and he said, "I do not actually run anything." So presumably he got paid his Cabinet Secretary salary for horizon scanning, and all that kind of stuff, but not actually running things. I am interested in what you mean when you say job sizing: because the number two, or the number three, or the number six in an organisation actually may be doing a more demanding job than the figurehead at the top.
Mr Cockburn: I do not think the Cabinet Secretary is exactly a figurehead, if you look at the range of his job.
Q280 Mr Prentice: I do not think he is a figurehead either.
Mr Cockburn: Quite honestly, whether you have an easy job or whether you have a hard job earlier, people might say to Sir Alex Ferguson, "You have got a really easy job because your team keeps winning", but how often is it the excellent chief executive might make an organisation feel easy and be successful simply because he is brilliant at it? We are more concerned with what is his weight of responsibility, what is his accountability?
Q281 Mr Prentice: I recall John Browne when he was Chair/Chief Executive of BP. He got paid some eye-watering sum of money, and he readily conceded that he did not need the money himself, but he got paid those millions every year because it was necessary, in the salary hierarchy, for him to get that money.
Mr Cockburn: Yes. We have not quite reached that level with our pay review remit yet, but the principle of relating salary to real responsibility, objectively based, and the other considerations that we take into account to set the tone: that individual is a leader of that whole organisation and, if his leadership is not measurable or has any influence whatsoever, he should not be there, quite frankly. That is why you are there: to provide that leadership, the drive and the motivation from all of your team to produce at the end of the day. Our people, 8,000 of them, are responsible for billions of pounds of public expenditure, so it is right that we aim to get the best quality leaders to oversee these vast sums.
Q282 Mr Prentice: We are, theoretically, responsible for some awesome spending, if you go down that road, but can I ask you about private and public sector comparability. I have in front of me a note that we got from Sir John Baker, Chair of the SSRB until 2008, and he said in his note to us that comparability is not necessary for recruitment and retention of good people in the public sector, as witnessed by the huge discrepancy there already is between private/public sector remuneration at the moment, and that is your line, is it not? You pay the most modest amount that you can get away with in order to get those famous good people you talked about a few moments ago?
Mr Cockburn: Yes. I think, in general, that is right. At the end of the day, you have got to make sure you have got people of the right ability. We are not saying you should employ second-class citizens to run the public sector. I think we have got people who, in ability terms, would be a fair match for anybody outside. We are very fortunate that we have people to apply for these jobs who are not solely and exclusively motivated by these high awards, and although you hear of these multi-million packages, very few people actually get them. Even in big private sector organisations, and I used to be a board member of BT, the vast majority of BT's executives were not earning these eye-watering amounts of money the top guys were. Therefore, if you look at the quality of the people that come in, even with the salaries that we offer, which in general terms we are proud of, we do not consciously under pay, but at the top levels there are, undoubtedly, people employed in the public sector who, if they chose, would be very marketable in the private sector.
Q283 Mr Prentice: We constantly hear this.
Mr Cockburn: It is true, and some of them do actually leave to do this. Thankfully, though, we have got a sufficient number that stay and we have got a good flow in each year of talented people. If we do need to pinpoint individual expertise, we will pay a premium rate for doing so, and we do not have to do that too often, but we have the flexibility to do it if we need to in the interests of the taxpayer and public sector performance.
Q284 Mr Prentice: One final point, if I may. You recommended a 2.8% increase for the senior military, and the judges and all the other people were getting 1.5%, something like that.
Mr Cockburn: Although we recommended 2.1.
Q285 Mr Prentice: You did.
Mr Cockburn: But they got 1.5.
Q286 Mr Prentice: Why did you recommend that 2.8% to the military: because they have got nowhere else to go, have they?
Mr Cockburn: It was a particular issue, because there were problems of differential between one star and two star. The one stars and the rest of the Army are subject to their own pay review body and the very senior military are covered by ours. What had happened was there was a compression of differentials and there was a real danger, and we saw evidence of it, that there was no pay incentive for brigadiers to become major generals because the pay difference was so---
Q287 Mr Prentice: That is surely not about pay, is it?
Mr Langley: There are two things about the military. One is that because a lot of the defence contracts have been sent out to tender, some of these top guys and girls are working alongside defence contractors who do similar sorts of job who are actually earning quite a lot of money, and, therefore, there is a secondary market, if you will, for senior military, and that is a very important issue.
Mr Cockburn: That was a wrinkle that we needed to sort out, and that was a way of doing it, but, in general terms, if you look over time, they have not consistently done better than the rest. This was really fixing a problem that you have to do from time to time. In the same way with judges, every few years we do a more fundamental review of judges' pay and, where they have fallen behind, there may be a catching up necessary to do this. In the same way as when we look at MPs each Parliament there is a kind of catching up process once a Parliament.
Q288 Chairman: Your point Mike though, I think, goes back to what we were talking about earlier on. It is the fact that, as you say, we have put bits of the military into market-facing situations. Nobody, when we were doing that, thought about the consequences in terms of having to produce market-facing salaries, but you are saying that is exactly what is produced by it.
Mr Langley: As you quite rightly said, the military in the past thought there was nowhere to go: "I will just carry on until I get to my retirement age and I will have a reasonable pension and, if I am lucky, I can get another job", but now they can see that they can get another job, and at the age of 50, maybe, they think, "Here is a job that I can do quite easily for the next 15 years." The other thing that is very important about the top military is that when they are promoted to the first rung of our remit group they have to accept that they will not necessarily carry on to retirement age, that they are only guaranteed one term.
Q289 Mr Prentice: What is a term?
Mr Langley: Two or three years in the next job, and after that job is finished there may not be another job for them. So the people who are in the rung just below say, "Look, if I take this job with a very modest pay increase, I may have another pip on my shoulder but I may actually be curtailing my potential earnings from ten years to three years."
Chairman: Okay.
Q290 Kelvin
Mr Langley: That is absolutely right, provided the differential between what they are paid in the public sector and what they might potentially earn somewhere else, whether it is in the private sector or the wider public sector, is not too great. I think the people that we talk to when they come to visit us and give evidence are people who really enjoy their jobs. They find them very interesting mostly, some of the senior civil servants we talk to have very, very interesting jobs, they move from one department to another very often and so they have a wide sense of job responsibilities that they can get without moving outside the organisation, and as long as the discount, the pay discount, the benefit discount for doing that job is outweighed by the job interest and the public sector ethos, that is okay, but if it gets out of kilter, if the potential outside becomes too great, then they will go.
Q291 Chairman: Are local authority chief executives a category that you might take under your wing, do you think, properly?
Mr Cockburn: We have not been invited to look at them in the past, but back to an earlier question, if you are saying, "Would it be appropriate?", insofar as they seem to be looked at on an individual basis rather than a collective basis, if we were asked to look at it, obviously, we would look at it.
Q292 Chairman: My question is you are not empire builders, you have not identified other bits of the public sector which you think should probably come within your remit, but you are open to invitation?
Mr Cockburn: Yes.
Q293 Chairman: Finally, transparency. Presumably we are moving to a situation where the presumption should be that all publicly paid people have transparent salaries, are we not?
Mr Cockburn: Yes.
Q294 Chairman: And you are in favour of them?
Mr Cockburn: Yes. In fact, actually permanent secretaries' pay is published, military pay, our pay.
Chairman: Our pay!
Mr Prentice: Our fees are in the public account.
Chairman: Our allowances, unfortunately.
Q295 Mr Prentice: Before you finish with this transparency of pay and so on, do you think there is a ratio, perhaps, between the lowest paid person in an organisation and the highest paid person in an organisation that would work, or would you not go down that road at all?
Mr Cockburn: I would not. It is very arbitrary. In some cases there may be a good reason why. I think you could have an eye on it. There might be pressure for private sector committees to display such information in their report and accounts each year just to show this up.
Q296 Chairman: Thank you for coming to see us. It is nice to meet the people that set our salaries, more or less, and we have learnt a lot from you.
Mr Cockburn: Ten to 15% is what we recommend.
Q297 Chairman: The problem is, with the best will in the world, if you come forward with a proposition in the next period of time to increase MPs' salaries by ten or 15%, you will be laughed out of court, will you not?
Mr Cockburn: We have said so, of course, in the past and you have not accepted it.
Q298 Chairman: Thank you very much for this morning.
Mr Cockburn: It was a great pleasure.
[1] Non-Departmental Public Body
[2] Higher Education Funding Council for
[3] Senior Salaries Review Body