Memorandum from the Institute of Directors
ABOUT THE
IOD
The IoD was founded in 1903 and obtained a Royal
Charter in 1906. It is an independent, non-party political organisation
of approximately 50,000 individual members. Its aim is to serve,
support, represent and set standards for directors to enable them
to fulfil their leadership responsibilities in creating wealth
for the benefit of business and society as a whole. The membership
is drawn from right across the business spectrum. 81% of FTSE
100 companies and 73% of FTSE 350 companies have IoD members on
their boards, but the majority of members, some 70%, comprise
directors of small and medium-sized enterprises (SMEs), ranging
from long-established businesses to start-up companies. IoD members
are entrepreneurial and resolutely growth orientated. More than
two-fifths export. They are at the forefront of good working practices
and have embraced the technology of the new economy.
IOD RESPONSE
TO THE
INQUIRY
Our responses to the questions posed by the
Committee are followed by further IoD data and recommendations.
DIRECT RESPONSE
TO QUESTIONS
1. Are the right arrangements in place for
setting and monitoring pay and other benefits for top posts in
the public sector?
No.
(a) Are they fair?
No.
(b) Are they transparent?
No.
(c) Do they produce the right results?
No.
(d) Do they provide value for money?
No.
(e) Do they inspire public and political
confidence?
No.
2. Does there need to be consistency regarding
these arrangements between different parts of the public sector?
Not necessarily, what matters is getting the right
people to do good jobs and then being completely transparent about
the total remuneration (ie salary, bonus, benefits in kind, employer
pension contribution etc) they receive. Transparency is certainly
one area where there is a damaging lack of consistency at present.
For example, government department accounts list directors' remuneration,
but local authority accounts do not. There should be full transparency
for all public bodies.
3. Does there need to be comparability of
pay between top posts in the public sector and equivalent posts
in the private sector?
Some sort of comparability may be useful, but only
as a guide. There has to be a risk factor included ie the risk
of dismissal for poor performance is much greater in the private
sector, and so remuneration should be correspondingly higher in
the private sector.
(a) If so, how should equivalent posts
in the private sector be identified?
Not solely from looking at the City of London and
the largest UK companies. It is often argued that public sector
executives could walk into City jobs. In some cases this may be
true but, for executives who have spent their whole careers in
the public sector, it is not obvious that this is the case.
4. Is there evidence of executive wage inflation
caused by public sector organisations competing with one another
for candidates?
Yes, although we don't have any systematic evidence.
But anecdotally, it is clear that senior civil servants and local
authority executives, for example, frequently move from department
to department, or from authority to authority, and receive higher
remuneration. It is also worth examining reorganisations in, for
example, local authorities, which tend to be accompanied by large
increases for directors.
5. What role should consultancies play in
the determination of pay for top public sector posts?
None. Using consultants for this purpose is a waste
of taxpayers' money and should be done in-house. There is a genuine
risk of a form of cartel if the same consultancy advises a number
of different public sector organisations.
6. Is the balance right between executive
pay and other benefits? eg bonus, pension
What matters is not the relative size of salary,
bonus and pension but whether it is sufficiently tied to proper
performance measures. It seems that this is far from the case
at the moment.
7. Do the pay levels for top posts in the
public sector have a direct impact on the performance or qualities
of the people filling those posts?
Again, it's not about the precise level, but whether
pay and conditions are tied to performance, so that good performance
is rewarded and poor performance results in dismissal.
(a) What impact do the performance
or qualities of the people filling top posts in the public sector
have on the performance of the organisations for which they work?
As in any organisation, the quality of the leader
is crucial to the organisation's success. However, senior civil
servants generally operate under greater constraints than private
sector executives.
8. Is there an appropriate benchmark or ceiling
for top public sector salarieseg the salary of the Prime
Minister, or a factor of average pay?
It is difficult to say. The old culture of public
service would lead to the conclusion that, yes, there should be
a ceiling, and that being paid more than the Prime Minister is
excessive. A new model, where executives move in and out of the
public and private sectors and are much more accountable for their
performance, would suggest that such a ceiling would limit the
private sector talent that could be brought in. However, we currently
seem to be in the worst of all worldsa disappearing culture
of public service, few executives moving between the public and
private sectors, insufficient accountability, and high levels
of remuneration.
9. Can England and the United Kingdom learn
from the experience of other countries or the devolved governments
in this area?
There are lessons to be learnt about transparency
from the US. In a number of US states, the salaries of all state
employees are available online for anyone to see. We would suggest
that this could be adopted across the public sector in the UK
for those with remuneration of £50,000 or more. The Obama
administration has also frozen the pay of White House staff earning
more than $100,000. In the middle of a recession, with increasing
numbers of private sector firms agreeing pay freezes, this is
a measure that could be followed. When recovery begins, there
will need to be a severe fiscal tightening to restore the public
finances to balance, and so such a measure could be adopted for
senior public sector staff in the UK.
1. EXISTING DATA
ON EXECUTIVE
PAY AND
BENEFITS
In addition to our responses to the above questions,
the IoD has extensive member survey data on pay and pensions that
may be useful when considering the issue. Some sort of comparison
can be made with data concerning the public sector.
1.1 Basic pay for an IoD member who is a managing
director of a small company (up to £5 million turnover) was
£65,000 last year, for a medium-sized company £100,000
and for a large company (£50 million to £500 million
turnover) £150,000.[9]
1.2 54% of IoD members who are managing
directors of small companies received a bonus or dividend averaging
£24,000 last year. For medium-sized companies the average
bonus/dividend was £25,000 received by 61% of managing directors
and in large companies the average was £42,000 received by
67% of Managing Directors.[10]
1.3 In the public sector, executive pay
data is rather patchy. The most comprehensive pieces of research
on the subject that we are aware of have been conducted by the
TaxPayers' Alliance. The organisation's survey of executive pay
in local authorities found over 800 executives receiving total
remuneration of more than £100,000, including 14 earning
more than the Prime Minister and 132 earning more than Cabinet
Ministers.[11]
Similarly the organisation found that, among 140 government departments
and other public bodies surveyed (excluding local authorities),
there were almost 400 people receiving total remuneration of more
than £150,000 a year, including 21 people earning more than
£500,000 and almost 200 earning more than the Prime Minister.[12]
This represents strong evidence that executive remuneration in
the public sector is more than comparable with that in the private
sector.
1.4 The gap between the public and private
sectors with regard to pensions is extremely large. And this applies
to executives as well. Almost half (45%) of IoD members (encompassing
directors of small, medium and large companies) are not members
of an occupational or employer-sponsored pension scheme at all.
12% of directors are members of occupational defined benefit schemes,
interestingly, the same proportion as in the private sector as
a whole. The remainder of directors are members of occupational
defined contribution, group personal pension or employer-sponsored
personal and stakeholder pensions.[13]
1.5 By contrast, in the public sector, 90%
of employees are members of defined benefit pension schemes.[14]
In terms of individual retirement benefits in the public sector,
again as far as we know the TaxPayers' Alliance has undertaken
the most comprehensive research, estimating that there are over
17,000 retired public sector employees with retirement benefits
worth at least £1 million each.[15]
1.6 Large bonuses and "golden parachutes"
were once the preserve of the private sector. But the evidence
suggests that they are on the increase in the public sector, and
are not necessarily rewards for good performance.[16]
Indeed, it is clear that rewards for failure are not confined
to the banking system.
2. IOD RECOMMENDATIONS
It is reasonable to argue that executive remuneration
in the public sector has got out of line, especially when considered
alongside performance. The current recession makes the issue all
the more important. In addition to our responses to the questions
posed, we would offer the following suggestions to improve the
situation.
2.1 First, the important measure to consider
is not salary, but total remuneration. Total remuneration should
cover such items as salary, bonus, benefits in kind, London allowances,
relocation allowances, employer pension contributions and redundancy/early
retirement payments. Annual increases of total remuneration should
be analysed.
2.2 Second, we would suggest that the total
remuneration, including a detailed breakdown, of all public sector
employees with total remuneration of more than £50,000 (certainly
all those with total remuneration of more than £100,000)
could be published on a central website accessible to the public.
The website could allow name searches, allow browsing by public
sector organisation (including local authorities and quangos),
and keep historical data so that remuneration increases can be
tracked, including for individuals who move between organisations.
It is important that people receiving large amounts of taxpayers'
money be accountable in this way.
2.3 Third, the level of remuneration should
contain a sizeable performance element, although performance should
not be simply a box-ticking exercise. This must be accompanied
by loss of performance pay or dismissal for poor performance.
Too often, bonuses of equal amounts are paid out to the directors
of a public sector organisation, which suggests that individual
performance is not monitored.
2.4 Fourth, it should be recognised that
the risk of dismissal is far lower in the public sector than in
the private sector (notwithstanding the above recommendation)
and that executive remuneration should therefore be lower in the
public sector to compensate for this reduced risk.
2.5 Fifth, the severe fiscal crunch that
will be required to restore the pubic finances after the recession
is over presents a great opportunity for reform of the current
arrangements. Indeed, a performance bonus for permanent secretaries,
conditional on the individual's success in reducing administration
and overhead costs without cutting frontline services, would be
a positive development. Similarly, an incentive to deliver savings
on regulatory burdens for businesses would be a very useful aid
to economic recovery.
Thank you once again for inviting the Institute
of Directors to participate in this inquiry. We hope you find
our comments useful. We would be very happy to give oral evidence
if required. Should you have any questions, please do not hesitate
to contact me.
March 2009
9 IoC/Croner Rewards Survey, November 2008. Back
10
Ibid. Back
11
TaxPayers' Alliance, "Town Hall Rich List 2008", March
2008. Back
12
TaxPayers' Alliance, "Public Sector Rich List 2008",
November 2008. Back
13
IoD survey of approximately 1,000 members, February 2009. In 2007,
the latest year for which data is available, there were 2.7 million
members of occupational defined benefit pension schemes in the
private sector, just under 12% of the 23.4 million private sector
workers in that year (sources: Office for National Statistics,
"Occupational Pension Schemes Annual Report 2007", September
2008, Table 3.3; Office for National Statistics, "Public
Sector Employment Q3 2008", December 2008, Table 5-includes
private sector employment data). It is interesting that membership
of DB pension schemes follows the same pattern among private sector
directors as among their employees. Back
14
Office for National Statistics, "Occupational Pension Schemes
Annual Report 2007", September 2008, Table 3.4; Office for
National Statistics, "Public Sector Employment Q3 2008",
December 2008, Table 5. Back
15
TaxPayers' Alliance, "The UK Pensions Crisis", November
2008. Back
16
To give two examples, in 2007 the former chairman of HMRC, Paul
Gray, resigned following the department's loss of millions of
child benefit records. He was paid £137,000 for his departure.
David Higgins, the chief executive of the Olympic Delivery Authority,
was paid a performance-related bonus of £205,000 in 2007-08,
despite the budget for the Games rising to over £9 billion
(source: TaxPayers' Alliance, "Public Sector Rich List 2008",
November 2008). Back
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