House of Commons - Public Accounts - Twenty-Fourth Report

Select Committee on Public Accounts Twenty-Fourth Report

DEPARTMENT FOR EDUCATION AND EMPLOYMENT: REMPLOY LIMITED

MONITORING REMPLOY'S PERFORMANCE AS A SUPPORTED EMPLOYMENT PROVIDER

26. Remploy have achieved all but two of the targets which the Department have set for them since 1992-93 in Annual Performance Agreements[21]. Nonetheless, Remploy's operating deficit for each disabled employee increased in real terms by 16 per cent between 1987-88 and 1994-95 though it has since decreased by 7 per cent[22]. Also, each year since 1990-91, the Department's contribution to Remploy has exceeded the direct wage costs of the disabled workforce[23].

27. We asked the Employment Service how, in negotiating the Annual Performance Agreement, they ensure that the targets set for Remploy are sufficiently testing. They told us that in setting targets for Remploy they sought to take account of their experience of operating with Remploy, Remploy's performance against targets set in previous years, Remploy's experience in the commercial market place at any particular time, and the policy set by the Department, for example, in terms of a greater emphasis on placements as opposed to factory places. Having taken account of these factors, the Employment Service annually negotiated a set of targets with Remploy and, if agreement was reached, these targets were then put to the Department and to Ministers for their approval[24].

28. We asked the Employment Service why, if the targets were sufficiently testing, the cost of a Remploy factory place at 1996-97 prices had increased from £8,353 in 1987-88 to £10,626 in 1995-96. They told us that, in the period 1987-88 to 1995-96, Remploy had gone through some testing and difficult market conditions. Also, during that period the balance between Remploy's fit workforce and their workforce of severely disabled people had changed with the number of fit employees declining by 20 per cent and the number of disabled employees increasing by seven per cent. It was against that background that they had made a judgement as to the target which should be set for Remploy for the overall operating deficit per disabled employee[25]. The Employment Service also told us that no specific target had been set for the cost of a factory place because this might act as a disincentive to Remploy to move those employees who were able from a factory environment into an Interwork placement, by encouraging Remploy to keep more people in their factories in order to keep unit costs down[26].

29. There are significant variations in operating deficits between Remploy's business groups and individual factories with the same group[27]. We asked Remploy what steps they were taking to reduce the very uneven distribution of funding between their various operations with relatively cost-effective activities supporting the less cost-effective. Remploy confirmed that they had some factories which were operating at a break-even position and others which were making high losses[28]. Variations within the same business group occurred because factories were dealing with different products and different markets[29]. They told us that they were concentrating on those which were making a significant loss and trying to improve them. Remploy's big difficulty was that they could not just close factories which were making a loss. They had to bear in mind that they were employing severely disabled people and, therefore, had to find alternative business to put in those loss-making factories which was always quite difficult[30].

30. The Department confirmed that Remploy could not do what a normal business would do if high losses were being incurred, that is, close down the biggest loss-making factories. They pointed out, however, that over the last ten years Remploy had merged 12 factories and changed the trades in another 50. There was a good deal of restructuring and change going on within Remploy most of which had been geared to try and deal with the factories with the highest deficits but the process had taken longer than it would in a normal commercial company[31]. The Department emphasised to us that it was extremely difficult to close, merge or restructure one of Remploy's factories because of the likelihood of opposition from unions, the local community, local authorities and local charities[32].

31. In addition to the targets set in the Annual Performance Agreement, each year the Secretary of State agrees the performance targets for Remploy's executive directors to determine their non-pensionable bonus. The bonus, which is based on a percentage of basic pay, is on a sliding scale of performance achieved against individual targets. Within the bonus arrangements, there are penalties for gross under-achievement[33].

32. In view of Remploy's deteriorating financial position since 1987-88, we asked the Department whether the level of bonuses paid to Remploy's executive directors had been justified. The Department told us that Remploy's success over the last two years was considerable. Unit costs had been reduced by four per cent in 1995-96 and by three per cent in 1996-97 and they expected a further 10 per cent reduction by the end of the decade. Remploy had also increased the number of disabled employees by 13 per cent over the last five years and been very successful in rebalancing the employment they provided for disabled people from factories to placements. The Department noted that, until the last two years, the bonus paid to Remploy's executive directors had been less than 50 per cent of that available[34].

33. The Department went on to tell us that although Remploy's executive directors were working in a particularly difficult and complex organisation, they were relatively poorly paid. Even taking into account the bonus, their remuneration put them in the lowest decile of the Haye remuneration survey for companies of this size[35]. The Department added that they needed to provide a remuneration package which was attractive enough to recruit people into a quite difficult environment and also to retain them there[36]. In the last three years, there had been eight higher level management changes in Remploy at general manager and director level[37].

34. We asked Remploy how many disabled people held management positions in the Company. They told us that at present they had no directors who were registered disabled[38]. In the past, one of the directors had been a disabled person but he had had to retire and Remploy had been unable to find an alternative to him. The Department felt that this was a matter of concern and regret and told us that they had made every effort to change the situation[39].

35. We asked Remploy about the mix of employment opportunities they offered to disabled people. Remploy told us that most of their employees were in factories where the bulk of jobs was in manual work of various kinds, but they had some disabled people in office jobs using computers[40]. Remploy added that it had always been their intention to move into markets which required a relatively high skill. In fact, Remploy factories had changed over the years from simple hand work to areas such as electronics where qualities and skills were required and where a much higher rate of pay for labour could be justified. In the last ten years, there had been a 12 per cent improvement in real terms in the rate of pay of Remploy's disabled workforce[41].

36. Since 1989, Remploy have bought eight companies, six of which were experiencing financial difficulties, for £8.4 million mainly to increase their market share and extend the range of products which they manufacture[42]. Of that sum, £3.1 million was for good will[43]. The logic behind making the acquisitions was to improve the performance of the existing factories; and its main benefits accruing to Remploy have been 340 jobs for disabled people and increased sales which in 1996-97 amounted to £16.5 million[44]. However, we note that on acquisition, there were 450 fit employees in the eight companies. The workforce now consists of 240 fit employees and 320 disabled employees working mainly in 12 Remploy factories. Of the 210 fit employees who are no longer employed by Remploy, 100 left due to natural wastage, and 110 were made redundant. Redundancy costs to date have amounted to £0.8 million. Further minor rationalisation may take place in the future[45].

37. These acquisitions included the purchase in July 1989 of Spencer (Banbury) Ltd, which incorporated Silhouette Ltd, for £2.4 million[46]. In August 1997, Remploy sold off the Silhouette business because the long learning curves, intricate manufacture and short term nature of the lingerie business proved to be too difficult to integrate into Remploy's factories[47].

38. We asked Remploy whether overall they had made a profit or a loss for the tax-payer on the buying and selling of Silhouette. They told us that they had made a loss. Therefore, we asked Remploy whether it had been a wise decision to purchase the company. Remploy explained that Silhouette Ltd and Spencer (Banbury) Ltd were two operating companies which had been inextricably linked, the one making ladies' lingerie and the other making healthcare products. The main purpose of the acquisition had been to obtain the Spencer name and product line. Remploy estimated that about 100 disabled people had been making these products since 1989 and the gain of these jobs needed to be offset against the financial loss on the sale of Silhouette Ltd[48].

Conclusions

39. We note that Remploy have achieved all but two of the targets which the Department have set for them since 1992-93 in their Annual Performance Agreements. However, we also note that, despite substantially meeting their targets, Remploy's operating deficit for each disabled employee increased in real terms by 16 per cent between 1987-88 and 1994-95 although it has since decreased by 7 per cent. Also, since 1990-91 the Departmental contribution to Remploy has exceeded the direct wage costs of the disabled workforce. We look to the Department and the Employment Service to ensure that the targets set for Remploy in future years are sufficiently challenging and that pressure on Remploy to improve their financial performance continues to be maintained.

40. We observe that there are wide variations in the operating deficit per disabled person between Remploy's business groups and between individual factories within the same group, with relatively cost-effective activities supporting the less cost-effective. We are concerned that this cross-subsidisation between Remploy's groups and factories is not a cost-effective use of the taxpayers' money. We stress the need for Remploy to reduce these variations by continuing to merge factories, to reduce overheads and to change their commercial activities where significant operating deficits are being incurred.

41. We note the Department's view that it is necessary to pay performance bonuses to Remploy's executive directors to attract and retain the right calibre of staff. We look to the Department to monitor the arrangements for setting bonus levels to ensure that the amounts paid continue to be commensurate with the performance of the Company against their objectives.

42. We are concerned that Remploy currently have no directors who are registered as disabled to act as role models for disabled staff. We recommend that Remploy should seek to increase the severely disabled people represented in their directorate and senior management when vacancies arise and people of the right calibre are available. We endorse Remploy's intention to move progressively into areas of work where the pay and quality of work for severely disabled people can be improved.

43. We are concerned that Silhouette Ltd, which Remploy purchased for £2.4 million in 1989 as part of Spencer (Banbury) Ltd, was sold at a loss in August 1997 because the long learning curves, intricate manufacture and short term nature of the lingerie business proved to be too difficult to integrate into Remploy factories. We recommend that Remploy ensure that any future businesses that they consider acquiring are of a nature suitable for their severely disabled workforce.

21 C&AG's Report, para 5g) Back

22 Evidence, p15, para 33 Back

23 C&AG's Report, para 3.15 Back

24 Q7 Back

25 Q8 Back

26 Q8 Back

27 PAC 31, para 34 Back

28 Q39 Back

29 Q40 Back

30 Q39 Back

31 Q39 Back

32 Q76 Back