Top Pay in the Public Sector - Public Administration Committee Contents

4  Performance and reward

67. One of the main criticisms that we have heard of performance management of top public sector executives is the sense that dismissal on the grounds of poor performance is rare, and that instead senior staff who leave organisations against their own will are often encouraged to go with generous compensation payments. Christopher Johnson has told us that "the public sector has quite a lot to learn in terms of managing performance rigorously and consistently across a broad population of senior people".[85] Hamish Davidson was characteristically outspoken in suggesting that the public sector needed to apply "a lot more ruthlessness, frankly, in dealing with failure."[86]

68. Indeed, the TaxPayers' Alliance's main concern as expressed to us was not high pay itself, but rather "rewards for failure":[87]

    the generous rewarding of public sector executives after serious management failures are an abhorrent abuse of resources, particularly as they are awarded to executives who enjoyed massive salaries, prior to their dismissal, for being 'excellent managers' when clearly they were not.[88]

They recommended that "public sector executive employment contracts must contain clauses that exclude the possibility of payouts or compensation for loss of office should the individual be made to resign for reasons of proven poor performance".[89] Hay remuneration consultants broadly agreed, stating that "it is inappropriate for senior executives to be eligible for generous redundancy payments".[90]

69. Several of our witnesses countered campaigners' claims that all public sector jobs were secure, pointing to an increasingly high risk of dismissal for senior executives in local government and the NHS.[91] Tony Travers went even further, claiming that "in some parts of the public sector, the downside risk of things going wrong is total ruin".[92] Certainly, for managers of hospitals, schools and children's services, failure—real or perceived—can mean national opprobrium.

70. There is also a side issue here. At the top of some public sector organisations an employee's continued employment often depends to a large extent on personal and political factors. In August, the Secretary of State for Communities and Local Government asked the Audit Commission to investigate severance settlements paid to local authority chief executives, saying that

    it's not acceptable for town hall chiefs and council leaders to agree expensive deals to part company just because they don't get on or because they'd prefer to work with someone else. If a chief executive, who has served his or her administration well, yet leaves for no justifiable reasons, it does not mean a council should spend large amounts of taxpayers' money just to move them on to the next council so they can then find a more favoured face.[93]

71. The proposal has drawn a strong response from the Society of Local Government Chief Executives:

    The truth is that severance arises in the vast majority of cases not because of any genuine performance issue, but because a council leader wishes a change in personnel. Some local politicians seem to regard the costs of related severance settlements as an acceptable use of public monies, even though they hold elected office only on a temporary basis. The statutory protection bestowed on chief executives, as well as chief financial and legal officers, rightly provides a check against their whimsical or illegitimate dismissal by politicians which often causes personal distress and financial uncertainty for the individuals affected. To weaken this protection would be against the public interest and dismantle important protection against the potential abuse of power.[94]

72. David Clark, elaborated on this point in evidence. He picked up on a phrase used by a witness from the TaxPayers' Alliance about "examples of public sector executives who have left an organisation for gross incompetence almost"[95]:

    I think your phrase was "fired for nearly gross incompetence". I think gross incompetence is actually like pregnancy, you either are or you are not, you cannot be nearly. Let us just look at some of the people who have been fired before we get carried away. In a number of cases they have been fired for pure politics. Let us go back to Lincolnshire pre-Tony McArdle when Mr Speechley was the leader and forced out a chief executive who then got a huge pay-off, and why was he forced out, he was forced out because he was the one who called in the police who eventually put Mr Speechley in jail. He then returned to the chamber with a tag! In those circumstances the chief exec got a big pay-off for being sacked for doing the job, so it may be that somebody is nearly grossly incompetent but in a lot of cases they get the push for doing the things that you would want them to do.[96]

73. This particular example is about dismissal for personal or political rather than performance reasons. It is important to distinguish between the two, and we can see why senior staff working in a political context might need some protection from dismissal on a political whim—although generous severance payments do not seem to us like the best form of protection from the taxpayer's perspective.

74. We are, however, strongly in favour of rigorous performance management of public servants at all levels, including at the top. Dismissal for poor performance is rare in the public sector, apparently just as rare at the top as elsewhere, and this in a context in which poor public service provision and project and procurement failure are not exactly unknown. Where highly paid public servants fail to perform effectively, they should face the very real prospect of losing their jobs without any kind of generous pay-off. Clearly, assessments of performance will need to be sophisticated and well-informed, given the potentially serious consequences for the individuals concerned. In particular, assessments of individuals' performance should not be simply correlated from overall organisational performance, as many other factors may have influenced organisational success or failure.

Performance-related pay

75. One way to go further in the direction of ensuring that high pay is related to high performance might be to make an increasing proportion of executive pay performance-related. However, differences in attitude to performance-related pay are striking.

76. In general, executive positions in the public service are able to earn additional performance-related payments above base salary, but these are almost always at a much lower level than is common in the private sector. They nonetheless vary substantially. In the Senior Civil Service, such payments were received by more than 60 per cent of staff in 2008-09, averaging at approximately 10 per cent of salary.[97] NDPBs and other public bodies have their own arrangements: for example, for the Higher Education Funding Council for England (HEFCE) the maximum bonus payable to the Chief Executive has been 10 per cent of base salary in recent years, while at Ofcom, the equivalent maximum bonus has been 20 per cent.[98] Public corporations are the exception: senior executives at Network Rail could have been entitled to performance payments amounting to a theoretical maximum of an additional 100 per cent of their base salary in 2008-09.[99]

77. Human resources and reward professionals across the board believe that there is insufficient performance-related pay in most of the public sector,[100] and that if current performance-related pay systems are seen to have failed, that is because they have been poorly applied, or have sought to reward the wrong kinds of performance.[101] The Chairman of the SSRB told us that the body is "unashamedly in support of incentive performance bonuses",[102] with a few exceptions, such as the judiciary.[103] Hay remuneration consultants have put the basic argument for relating pay to performance most strongly by describing the alternative: "to pay people the same whether or not they perform—which is not even common sense, let alone good use of public money".[104] Christopher Johnson, in a similar vein, told us that service delivery improvements were difficult to achieve when pay systems were about "rewarding people for having a job rather than rewarding people for doing the job well".[105]

78. It is easy to theorise about a system of pay which would reward individuals for performance against objectively measurable, valid targets to which they could genuinely aspire to contribute; but it is hard to put such a system into practice, especially where outputs are "difficult to measure",[106] for example where people are responsible for providing policy advice (which may be ignored or overruled) or for delivering a service to a hard-to-reach section of the community as part of a complex chain of agencies.

79. Trade unions are largely opposed to performance-related pay. They believe it is misconceived in that public sector workers are not or should not be motivated by pay, describing it as "as much a demotivating factor as a boost to morale".[107] They believe it is poorly applied, in that it is not clear what performances it is supposed to reward.[108] They believe that it is reputationally damaging, in that it feeds the popular belief that there is a public sector "bonus culture", and this even though the amount of money actually involved is relatively slight.[109] Finally, they believe, at least for those parts of the public service where politicians set pay levels, that performance-related pay exists less to reward performance, than to provide a margin of expense that could easily be removed for broader political or economic reasons, without needing to reduce base pay:

    It is not money on top, it is part of the annual pay increase that is redistributed as an annual bonus … it is cheaper for the Exchequer because it is not paid on pensions, it is not paid on National Insurance or whatever else.[110]

80. This is particularly true at the moment, when the economic downturn, along with media pressure, has led to a number of public sector organisations to limit incentive payments. For example, civil service permanent secretaries agreed in February 2009 to waive their rights to a performance-related bonus for 2008-09, while the Ofcom executive board agreed in May of the same year that they should not be considered for bonus payments for 2009-10. In July 2009, the BBC Trust and the BBC Executive Board's Remuneration Committee came to an agreement that bonuses for Executive Board directors would be suspended indefinitely. These developments reflect an understanding that senior public servants need to be seen to share in the pain of a recession—but they also suggest that performance-related pay in such circumstances becomes less a matter of individual or even organisational performance and more about the performance of the wider economy.

81. This last point is a particular bone of contention. Jonathan Baume from the FDA told us:

    Ministers are arguing and were arguing that SCS [senior civil servants] should not get their bonuses, regardless of the fact that ministers have designed the current pay system and have insisted on an expansion of the bonus scheme. I felt that it was totally inappropriate for ministers to be taking that particular view.[111]

82. More widely, it is clear that the political and economic environment is not favourable towards introducing a system that would lead to more public sector workers receiving a greater part of their salary in the form of bonuses and other incentives. This is demonstrated by the recent furore over payments at the Ministry of Defence, where nearly 100,000 civil servants are employed, which resulted in headlines such as "MoD penpushers pocket £300m as British soldiers die in Afghanistan" .[112]

83. Regardless of the arguments for and against a greater proportion of senior salaries being directly linked to performance it is clear that such a move would not be acceptable in the current political and economic climate. The word "bonus" has acquired a toxic quality and become associated with unjustifiable reward - despite the fact that the eligibility for such payments is generally given instead of increases in base pay.


84. The debate around rewards for failure and performance-related pay feeds into a wider concern that some of witnesses had, namely that respect for public service workers, particularly those at the top, was diminishing, and that this lack of respect could result in public sector executives demanding salaries that are closer to private sector ones . As the SSRB has put it,

    These hugely dedicated people do not expect to receive the financial rewards of comparable leaders and senior managers in the private sector in return for this vital work, but they do expect recognition of the value of what they do, respect for their commitment to public service and fair pay.[113]

85. This point was also picked up by Polly Toynbee, who said she thought that top public servants "deserve more respect"[114] and by Christopher Johnson, who worried about "demonisation of fat cats" because it discouraged "really good people from coming into the sector, i.e. 'Why should I put up with that?'".[115] The FDA referred to a desire to see "less political scapegoating".[116]

86. We referred at the beginning of this Report to the recent barrage of negative news coverage about pay at the top of the public sector. Ironically, such coverage is likely to make it harder to find talented people to fill executive roles at significantly below the market rate. Why should people want to take on such roles, if the outcome is public vilification, especially where they could be vilified (probably less personally and publicly) while being paid five or ten times the amount in the private sector? For those whose skills are not so easily transferable, the problem of morale is likely to reveal itself further down the organisation: why should talented people aspire to a career in the public sector if they can see that those who are successful face media scorn?

87. We are concerned by the consistent media demonisation of senior people in the public service. Continued negative media coverage is likely to undermine one of the main intangible benefits of public sector work: a sense of doing valuable and valued work for the public good. In the absence of this sense of respect, the public sector is likely to have to pay more, rather than less, to encourage talented people into senior roles.

88. The Government, politicians in particular, need to stand behind and explain the decisions they have taken on senior pay when these are challenged. The Government has a responsibility even when pay is set locally: it should support the outcomes produced by the pay systems it has established.

85   Q 124 [Christopher Johnson] Back

86   Q 123 [Hamish Davidson] Back

87   Q 5 [Ben Farrugia] Back

88   TPA written evidence Back

89   TPA written evidence Back

90   Hay written evidence; The Government has recently announced plans to reduce the redundancy payments made to senior civil servants. Financial Times, 5 December 2009, 'Civil servants face big cuts in redundancy deals' Back

91   Q 1 [David Clark]; Q 118 [Hamish Davidson]; MIP evidence Back

92   Q 32 [Tony Travers] Back

93   BBC News online, 26 August 2009, Council boss pay-offs face review,, accessed 9 December 2009 Back

94   Letter from David Clark to the Chair of the Audit Commission, October 2009, online at _inquiry_October_2009.pdf, accessed 9 December 2009 Back

95   Q 75 [Ben Farrugia] Back

96   Q 77 [David Clark] Back

97   SSRB, Thirty-First Report on Senior Salaries 2009, Cm 7556, para 2.27 and Table 2.5; for example, the largest single bonus payment made by the Foreign and Commonwealth Office in 2008-09 was £15,000 HoC Debates, 501 c375-6W  Back

98   Ofcom written evidence Back

99   Network Rail Ltd, Annual Report and Accounts 2008, p 27 Back

100   Sir John Baker written evidence;Qq 105 and 122 [Peter Boreham]; Stephen Taylor written evidence; Qq 124 and 162 [Christopher Johnson] Back

101   Hay memorandum("Just because a few organisations…"); CIPD written evidence; Q 273 [Bill Cockburn]; Q 275 [Mike Langley] Back

102   Q 273 [Bill Cockburn] Back

103   Q 277 [Bill Cockburn] Back

104   Hay written evidence Back

105   Q 176 [Christopher Johnson] Back

106   SSRB written evidence Back

107   FDA written evidence Back

108   Civil and Public Service Issues Q 34 [Paul Noon] Back

109   FDA written evidence Back

110   Q 29 - Civil and Public Service Issues [Jonathan Baume] Back

111   Q 36 - Civil and Public Service Issues [Jonathan Baume] Back

112   Daily Mail, 13 November 2009 Back

113   SSRB written evidence quoting 30th report Back

114   Q 25 [Polly Toynbee] Back

115   Q 135 [Christopher Johnson] Back

116   FDA written evidence Back

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Prepared 21 December 2009