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.
Respect
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,
http://news.bbc.co.uk/1/hi/8221512.stm, accessed 9 December 2009 Back
94
Letter from David Clark to the Chair of the Audit Commission,
October 2009, online at http://www.solace.org.uk/library_documents/SOLACE_response_to_Audit_Commission_severance
_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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