Examination of Witnesses (102-119)
MR PETER
BOREHAM, MR
DAVID EVANS,
MR CHRISTOPHER
JOHNSON AND
MR HAMISH
DAVIDSON
21 MAY 2009
Q102 Chairman: We are very delighted
to welcome this morning Peter Boreham, who is Head of UK Executive
Remuneration at the Hay Group, Hamish Davidson, who is a recruitment
consultant of long pedigree, David Evans, Head of the Pay and
Labour Market Services, Capital Survey and Research Unit, and
Christopher Johnson, UK Human Capital Leader at Mercer. The reason
we have assembled you together is because you know everything
there is to know about executive pay in both the public and private
sector. As you know, we have asked you here because we are looking
at the issue of top pay in the public sector and, because you
know all about it, as you are in the business of finding people
for appointments and advising on pay levels, we thought you were
good people to bring in. Could I start with a couple of questions
to kick us off? Do you think there is an issue here? We have started
doing this because it has been said that there is an issue about
what is happening to top pay in the public sector. Are we right
to think that there is an issue there that needs investigating
or not?
Mr Johnson: The
straight answer is, yes, there is an issue, and the issue for
me has got two parts to it. The first part of it is that it seems,
in terms of the public and political debate about executive pay
in the public sector, there is not a consensus about what it should
look like, so there is a lot of pressure claiming that public
servants are paid too much, and yet you can argue, which is my
second point, that there is insufficient money for executive pay
for the public sector to recruit and retain the talent it needs
to deliver on what I would argue is actually a very challenging
task, which is in a period of pressure on public expenditure,
pressure to deliver high quality services to citizens and to satisfy
the taxpayer about value for money, good leadership and management
is going to be crucial. In summary, I think there is insufficient
consensus publicly and politically about the nature of public
pay in the public sector and, secondly, I think there is a real
challenge that public sector organisations are facing, which is
securing and retaining the calibre of talent they need to deliver
on the expectations that are being placed upon them.
Q103 Chairman: Thank you for that,
but I am not sure from that whether you are telling us, because
of this need to go out and get the very best talent in this market
place, we should be paying people more. Is that the conclusion?
Mr Johnson: There is an interesting
conundrum here. It is possible to get really good people to join
the public sector. The Civil Service, which is one part of the
public sector that tends to be more open at senior levels, has
done very well securing talent coming in and much of the time
the private sector has been willing to look at the opportunity
in the round, quite often taking a significant reduction in earnings,
but seeing a very attractive role at the heart of doing something
important for the country and balancing those things together
and saying, "Yes, I would like to come and play a part."
So there are people that it is possible to recruit, but two challenges
flow from the back of it. One is that I do not think I can see
consistently the ability of the public sector to attract great
talent, and, secondly the pay levels that you need to put on the
table to attract people in are higher than the pay levels of the
people that are already in the public sector and there is a very
significant internal relativity pressure which is, I think, becoming
quite a serious problem.
Q104 Chairman: Is it possible to
say, in general terms, whether top pay in the public sector is
too high or too low?
Mr Johnson: I think it is, in
general terms, too low, because in general terms we are not able
to secure the talent into the public sector.
Q105 Chairman: That is a novel contribution
to our deliberations. Can I hear from the others on that?
Mr Boreham: I think from our perspective
at Hay Group, we are concerned at the way that pay has grown quite
rapidly at the top roles in the public sector, not because the
growth itself is wrong, because I think we share some of Chris's
points about attracting top talent, but the growth has all been
in the form of fixed guaranteed remuneration. I think we would
be happier if a greater proportion of remuneration was linked
to the value that those organisations were delivering to their
users and to the broader public.
Q106 Chairman: We will come back
to that, I am sure. Hamish, do you want to come in?
Mr Davidson: I would agree exactly
with that point. Right across the piece, to be honest, I think
you have to take note that there are really three categories of
post that we might be talking about here. Certainly in terms of
the ones you were looking at yourselves, there will be the non-executive
chair type roles, there will be roles for agencies and bodies
that are dealing fundamentally with organisations in the private
sector, for example the FSA, where you need to compete for a particular
kind of candidate, and then the rest, and I think the rest of
those posts, in terms of how the salaries are moving, have been
fundamentally influenced in recent years by the movement on pay
and inflation in local government.
Mr Evans: I think there are differences
across the public sector. I think there is a danger in looking
at the public sector as a whole. I tend to cover the NHS. I think
if we looked at different parts of the public sector, we would
find different pay levels. I think there is also the issue of
who you compare yourselves to in terms of the private sector in
establishing some of the proper benchmarks.
Q107 Chairman: There is work to do
to explore as well whether we ought to try and get some more coherence
into the public sector, or at least coherent principles into the
public sector, but we will come to that later. Can I ask one further
question before I hand over to colleagues? You are a collection
of, I think you call yourselves, recruitment consultants. You
do not. Perhaps you would tell us what you call yourselves.
Mr Boreham: We have one recruitment
consultant.
Q108 Chairman: I thought we had the
head-hunters and the recruitment consultants, or remuneration
consultants. Is that right?
Mr Boreham: The three of us are
involved in advising remuneration committees and organisations
on how to pay their people.
Q109 Chairman: Perhaps you would
just tell us what you actually do?
Mr Boreham: Let us imagine we
are doing a project for a foundation trust hospital. The remuneration
committee of the board would approach us and would ask us to help
it. We would help that remuneration committee to develop their
pay strategy: where in the market is it pitching its pay, who
is it comparing itself to, where does it want to be positioned?
We will then produce some market data looking at how they are
doing against that strategy, make recommendations about salaries,
whether or not they should be looking for variable compensation
and, if so, how would that be designed. That would be a fairly
typical project for us.
Mr Evans: We undertake a salary
survey of NHS trusts in England. Something like 66 trusts take
part in that survey, so we collect data in terms of what they
are paying in terms of basic salary, bonus, perhaps car benefits,
other conditions of service, and we would use that, as Peter said,
to share that with the trust in terms of establishing a benchmark.
If they were a major city teaching trust we would try and suggest
that they also benchmark themselves with other like trusts in
terms of establishing whether they were paying a comparable rate.
Mr Johnson: I think the point
I would add to those two observations is that an important area
of support that public sector organisations need is understanding
the right mixture of things to do and that they are put together
in one package. So it is not just about pay, it is about the structure
of the contract and the reward arrangements of the individual,
and there are many things that are attractive about working in
the public sector that are not about pay. For example, if you
were a senior commercial person, say, in a big organisation like
BP or Shell, you could be interested in coming into the public
sector because the scale in which you are operating in a commercial
role is much more significant than might be the case out in the
private sector. So helping organisations to understand how to
balance these different factors together and to structure a reward
proposition, I think, is a very important piece of advice and
then informing it about what goes on competitively and what does
that imply about the level of pay, I think, is then a second part
of the support that public sector organisations need.
Q110 Chairman: So we understand the
area, how much would you get paid for helping with a typical appointment
of the kind you are talking about?
Mr Boreham: For one of our clients
the fees would vary enormously, but if we were talking about a
very simple piece of benchmarking, that would be a few thousand
pounds. If you were talking about a very substantial top to bottom
review of strategy, design of incentives, and so on, that might
head towards £100,000.
Q111 Chairman: I am asking innocent
questions. I cannot quite understand why these organisations do
not know themselves well enough to be able to run appointment
systems. I do not know why they have got to add several thousand
pounds to every appointment to get people like you involved. You
tell me.
Mr Evans: It is not only appointments,
it is when they are reviewing their annual increase, effectively.
Mr Boreham: It is a question of
expertise. The reality is in the public sector the level of reward
expertise within most organisations is limited compared to the
private sector, partly because the private sector has exciting
toys to play with like incentive programmes and company car schemes,
share schemes, and all those things. Typically, the level of reward
expertise in the public sector is limited, so they are buying
expertise. They are also buying independence and they are buying
a broader perspective, because the reality is we work with quite
a lot of organisations, so we bring a perspective across the sector,
across several sectors, which will allow them to make better decisions.
Q112 Mr Prentice: Why do we not have
a review body for foundation trusts? What do you do that a review
body could not do in recommending salary increases for the top
people in NHS foundation trusts?
Mr Boreham: NHS foundation trusts
have devolved responsibilities. Therefore, they have devolved
responsibility for remuneration.
Q113 Mr Prentice: I understand all
that, but we have got senior salary review bodies for the military,
for the judiciary, for MPs, but we do not have one for NHS foundation
trusts?
Mr Boreham: The judiciary and
MPs are centralised, whereas foundation trusts have devolved commercial
freedoms. Therefore, their boards are responsible for determining
pay and, therefore, they need pay advice that is particular to
that organisation, whereas the judiciary are appointed centrally:
they are on centrally controlled contracts.
Mr Evans: The Senior Salaries
Review Body does cover NHS very senior managers who are employed
by strategic health authorities, primary care trusts and ambulance
trusts.
Q114 Mr Prentice: I understand that,
but not NHS foundations trusts. So you have got two different
ways of determining the pay of very top people in the NHS.
Mr Evans: Yes, and that has created
tremendous problems, because trusts and foundation trusts have
got the freedom to set salaries, whereas the other bodies that
are covered by the very senior managers framework are constrained,
and that has caused some tensions, because PCTs and strategic
health authorities feel that they cannot recruit and retain because
salaries are moving faster, because people like foundation trusts
have increased them at a higher rate. So there is tension within
the NHS.
Q115 Mr Prentice: Do you think all
parts of the NHS should be treated in the way that NHS foundation
trusts are treated: that they should all determine their own pay?
Mr Evans: Government policy is
that we are moving to a situation where there will be more foundation
trusts where more organisations have got the opportunity to apply
for foundation trust status.
Q116 Mr Prentice: Is a fragmented
and atomised NHS where every part of NHS family, if I can put
it that way, can determine their own pay to get the best people
something that you would advocate?
Mr Evans: Yes, I think I probably
would, within some sort of framework, within some sorts of constraints,
and they are subject to monitoring by people like Monitor, who
monitor their performance, and how they set their remuneration,
again, is subject to public scrutiny.
Q117 Mr Prentice: Hamish, you do
something slightly different, do you not? Could you add your bit
to this?
Mr Davidson: We probably come
in at a later stage, in the sense that an organisation decides
there is a vacancy, or a vacancy looming, and my job is to: go
along and help them articulate what the job and the person specification
is; and then to work out a strategy of how we might attract candidates;
to then potentially go and find those candidates through a combination
of advertising and, possibly, head-hunting; to perhaps assess
those candidates at initial interviews, et cetera; take soundings
on them; to go back to the client with all the materials, for
the client to agree on the particular shortlist to see; and then
to assist the client make an appointment. I take them through
that entire process.
Q118 Mr Prentice: A mischievous person
could say that these organisations, first of all, spend several
thousand pounds identifying the pay level they are going to be
working at, and then they have got to pay several further thousand
pounds to employ someone to go out and recruit somebody.
Mr Davidson: They may well do.
Some of these organisations, of course, recruit themselves. Certainly
in central government posts I would have thought at least over
half of the posts are undertaken themselves. The reason for the
increased use of head-hunters over the years and moving to somewhat
more of a private sector system of recruitment is fundamentally:
(1) If you have tried and failed to appoint, then maybe you have
to go back to the market again, and you think, "We will need
some assistance generally with candidates." (2) There has
been a thinning of HR capacity to actually help on the recruitment
process as bureaucracy has been cut back and resources pushed
to the front line. (3) The increased complexity of the roles,
particularly at chief executive level, means that the kind of
skills you are looking for are in very short supply and, therefore,
it is a narrow pool, and some of these people are not so prone
to apply of their own volition. (4) There may be the perception
generally from clients that there are very few people who could
do the job and, therefore, they will need to be teased out. (5)
There has been an increasing desire to bring in some kind of independent
assessment to assist those undertaking the appointments. (6) There
may be a desire to test the market anyway, to test internal candidates
against what is available externally. (7) There has been an increased
"mortality" rate, particularly of chief executives,
particularly in the NHS and local government, if they are perceived
to have failed and the organisation is not delivering; and (8)
also, of course, to address the diversity issues, where there
has been a particular desire to bring in a greater range of candidates
than the typical male, stale and pale that you have had before.
For all these reasons, I think you have seen an increasing tendency
on occasions to utilise the services of recruitment consultants.
Q119 Mr Prentice: But when you have
said all that, if you are looking for an instant way to reduce
the public sector pay bill, you could remove yourselves from the
picture and that would produce an instant huge saving, would it
not?
Mr Davidson: It might do, but,
of course, one of the interesting tendencies in recent years is
that candidates have become more and more reluctant to apply of
their own volition for posts, unless they think that there is
strong likelihood that they are going to be a candidate and, indeed,
possibly get appointed. There has been a change in behaviour from,
say, 20 years ago when I was first doing this kind of work in
the public sector, a dramatic change in behaviour, for a whole
variety of reasons.
Mr Boreham: I think there is also
a danger that, if organisations review their own pay policy without
external independent advice, they may come to some spurious conclusions.
I will give you an example. We are a local authority. Our turnover
is half a billion pounds. If we look at the listed company market,
that would put us into the FTSE mid 250. A FTSE mid 250 chief
executive would be paid a salary of half a million, plus bonus.
Let us set our salary policy at half a million. It sounds superficially
reasonable, any of us could tear that to shreds as a policy, but
I think you need an external perspective to do that, otherwise
you end up either with misinformed decisions or, indeed, the executives
themselves pushing for something and the non-executive directors
not having enough confidence to push back.
Chairman: There is a further charge against
the effect of your work, which Kelvin is going to talk to you
about.
|
