Examination of Witnesses (120-139)
MR PETER
BOREHAM, MR
DAVID EVANS,
MR CHRISTOPHER
JOHNSON AND
MR HAMISH
DAVIDSON
21 MAY 2009
Q120 Kelvin Hopkins: I am deeply
sceptical about all of this, may I say. If I was being very cynical,
I would say you are all part of a little club levering up a small
group of people's salaries and taking a big cut yourselves, because
that is what you do. Maybe this is unfair, but Polly Toynbee says
head-hunters have deliberately inflated pay, poaching top players
from a tiny pool of people and using this very small market to
lever up the price. I find her argument quite persuasive.
Mr Davidson: I read Polly's statements
with interest, and she is, of course, slightly skewing the real
perspective here. If I can explain this in terms of what the real
reason for salary inflation actually is, particularly looking
at local government. I am aware that this is taking events out
of scope here, but it has a knock on effect to the posts that
you are considering. Question: why has there been salary inflation
at all? I have made the point already that a lot of these jobs
have become much more complicated, so it is perceived that fewer
people can do the jobs. The second point is that, compared with
20 years ago, central government now rates highly the best of
talent in local government. Twenty years ago they did not. If
I had gone to do a senior level recruitment exercise for the Civil
Service and suggested we head-hunted within the local government
community, I would have been laughed out of court. Today local
government is considered one of the few areas of public service
where there are real, solid delivery skills, and delivery skills
are what are being looked for. The second point is the unintended
consequence of the CPA[1]
regime, which ended up causing many organisations to decide: rather
than appoint someone on the up, we will need a serving chief executive
from elsewhere who has learned their mistakes first time around
and knows what to do differently and has a minimal learning curve;
and that links into a third point that does not seem to have come
up in your evidence to date, which is a behaviour one. In the
public sector people do not tend to take a cut in status or a
cut in salary; period. People do in the private sector, but typically
not here in the public sector. If you are moving into not-for-profit,
yes, but generally the public sector will not take cuts in status,
and will not take cuts in salary. Fourth, there is also an increasing
tendency, and it has not changed, to draw the present specifications
very narrowly, and therefore, again, one is dealing with an ever
declining pool of candidates in terms of how the positions are
specified right at the outset. Fifth, there is also an increasing
tendency, as I have suggested, of candidates not responding to
job adverts themselves. Candidates are much more concerned about
confidentiality nowadays. Again, 20 years ago they would have
been quite open with the leader of the council and with colleagues
about the fact they were going for a job. Today they are not.
They are worried about leaks, they are worried about undermining
the relationship with their leader, they are worried about the
knock-on effects of destabilising their organisation if word gets
out that they might be leaving. Consequently, candidates are waiting
to be approached and they are very suspicious. Years ago I recruited,
it ended up being, Bob Kerslake (then CX of LB Hounslow), to the
post of chief executive at Sheffield. I managed to assemble what
was considered a very strong shortlist in those days—this
must be about at least eight years ago. I could not achieve the
same today because not enough candidates of calibre would all
agree to go forward, and the point that Polly misses—this
is all building up towards salary inflation—is that people
need to be teased out, that the balance of power has shifted more
to the candidates to be able to negotiate hard on their salaries.
The final point that Polly completely missed is that, unlike in
the private sector, where typically a head-hunter's fee will be
based a percentage of their eventual remuneration (their pay),
that does not apply in the public sector. For the most part and
with few exceptions, in the public sector recruitment consultants
charge a flat fee.
Q121 Kelvin Hopkins: It is interesting
what you say, but I am still unconvinced. If I believed there
was a real correlation between higher salaries for the people
you have recruited to public authorities and the performance of
those public authorities, I might be convinced, but I do not think
there is. Indeed, we have got some examples of people in the quasi
public sector on vast salaries, each of whom, or the organisations
they are organising, have performed not well. I do not want to
single them out, but I could. I know a fair amount about several
of them, and I am not impressed with their performance, even though
some of them are paid over a million pounds a year. In the NHS
some of the NHS trusts have appointed smart money-saving business
types who have squeezed the services and the services have suffered
as a result. Stafford Hospital might be a case, and the money
they have squeezed out merely goes to pay their high salary and
their bonus for squeezing the money out. It does not actually
help anyone apart from themselves and, then, of course, they move
on and say, "It was not my fault." I am just not convinced
that this is the way forward. I may say I have been involved in
many public appointments myself, I have been on interview panels,
and we have made very good appointments without any advice from
yourselves.
Mr Davidson: I would not deny
that that is the case in most situations, but there are a number
of situations, equally, where organisations decide they do want
assistance or they have tried to recruit and failed. You have
been fortunate in your own experience. I doubt any of us here
would disagree with the thought that a very rigorous performance
appraisal is required, and I doubt if any of us would disagree
with the fact that failure should not be tolerated. However, one
observation I would make is that it does depend on how you judge
failure. I was involved, as some of you may know, in the recruitment
of the Sergeant at Arms and the Secretary to the Speaker of the
House of Commons, both of whom fell out with Mr Speaker and both
of whom subsequently disappeared. It was not a question of their
performance though, they were not perceived to have failed in
their jobs, but the relationship might have done. So we have to
be careful about what is perceived to be judged as failure.
Q122 Kelvin Hopkins: I think we could
make the mistake of arguing from the particular to the general.
There may be individual cases which I could quote as well. Nevertheless,
I am still not convinced. Have you done a study relating the success
of an organisation to the level of salary? There are a lot of
comparators that you could use in local government and in the
Health Service to do this.
Mr Boreham: I think that fits
with the thesis that, I think, a number of us share. The problem
is the money has all gone into salary. What we are saying is,
if this person is wonderful and is equipped to run this complicated
organisation, then an element of that pay should be linked to
them delivering what they have promised to deliver, and if the
organisation is not achieving the things it is supposed to be
achieving, then their variable pay is not delivered; if it achieves
more than was expected, then they receive more in variable pay,
and that actually deals with the value for money question that
you are addressing.
Kelvin Hopkins: I could go on, but I
think I have had my share.
Q123 Chairman: Hamish, you have explained,
quite well, I think, some of the reasons why we have had what
you have called salary inflation. If we were worried about that,
if we wanted to do something about that salary inflation, knowing
all you know about the market, how would you turn it round?
Mr Davidson: Fundamentally we
are here talking about the supply of candidates, and the issues
I think you might like to consider in that regard would be the
tendency of public sector employers to: write specifications that
are far too narrow; that require candidates to, effectively, walk
on water and perform miracles several times a day, which automatically
means you have got a very narrow group of candidates; and the
tendency often of the people creating these specifications, including
many head-hunters, I might add, to be pale, male and stale, et
cetera, in fact dull and boring too. I recall Sir Gus O'Donnell,
before he became Cabinet Secretary, indicating that what he thought
the Civil Service needed was more people with pace and passion,
and I put the point to him at the time that I am one of the people
required to go and deliver people with pace and passion, but do
you know what happens? The departments do not appoint them because
they are perceived as "too out of the box". So I think
the panels need to be ready to take a bit more risk here. The
failing with recruitment panels is the tendency to appoint to
the lowest common denominator and the tendency to appoint conservatively
with minimal risk, which is not something which I can understand.
I also think that the recruitment processes probably needs to
be less Masonic-like, particularly if you are trying to attract
private sector candidates who just do not understand some of the
processes and it is not explained to them effectively enough up
front. In particular, the speed of a typical public sector recruitment
process, which is typically much faster than it is in the private
sector, and candidates, as a result, have not emotionally fully
engaged to decide whether they do want the job or not. So, getting
asked by the panel, "If offered the job, will you accept?",
is quite a shock to the poor candidate who has just gone through
their interview that day. In terms of dealing with failure issues,
I would focus heavily on much more rigor in performance and appraisal,
and a lot more ruthlessness, frankly, in dealing with failure
altogether. For all of that, I have to say to you that there are
serious problems ahead, because, for the first time in a long
time, there is an entire generation of chief executives, leaders,
and managers in public services who have only ever managed in
growth budget situations. From 2011, we may be facing maybe 10
years of radical cuts altogether, and the people are not there.
Consequently, I am afraid, as much as it may pain this particular
Committee here, I think you are going to see organisations ending
up using head-hunters more to find those few people that have
got the required skills, because most of them were pensioned off
early.
Q124 Chairman: So we have got all
the wrong people running these public organisations.
Mr Davidson: No, a lot of people
that do not know how to manage in a downturn.
Mr Johnson: I was going to make
three more process suggestions about things that could be done
which could help contain inflation in public sector pay. I certainly
agree with the point that Hamish has just made about the importance
of managing performance, and I think the public sector has quite
a lot to learn in terms of managing performance rigorously and
consistently across a broad population of senior people. Secondly,
I think it is very important that the public sector grows talent.
The Civil Service is 500,000 people strong—that is a large
organisation, by any stretch of the imagination—and ought
to be able to be capable of growing a lot of its own internal
talent, but that does imply very careful exposure to different
experiences through a career which may be outside as well as inside
the public sector. So I put a lot of weight on talent management
processes. The third thing I would do is I would give more emphasis
towards cash than base pay. I think this was a point that Peter
was making. At the moment there is very little pay that is variable
and linked to performance in the public sector, and I think if
there was more pay linked to performance, with risk as well as
upside, so it is not just about a bonus but it is about the real
risk of money being held back as well as money given for good
performance, that would help a lot in terms of inflation pressures.
Then the final thing is, I subscribe to the view that there is
a governance issue around this for the public sector, and in the
evidence I gave you[2]
I attached weight to looking at a pay review body process across
the public sector more broadly than it is today. I think it is
too bitty. I do think that different parts of the public sector
have different needs, so there is something here about focusing
on principles of reward for executives rather than specific pay
increases for particular groups, I think, and I think there are
governance mechanisms put in place around the use of non-executive
directors and reporting, and so on; but it frustrated me when
I was in the Cabinet Office that we were wanting to draw talent
into the Civil Service with great delivery experience from local
government, as Hamish indicated earlier, but the pay regimes in
local government are different from the Civil Service and got
in the way of our ability to attract people into the Civil Service.
From a citizen and a taxpayer point of view, that cannot be right.
From their perspective, I would have thought, there needs to be
more coherence, not to the point of consistency and performance
but certainly more quangos.
Chairman: Thank you for that.
Q125 Mr Prentice: Can I come in on
that? I want to talk a bit about openness and transparency, which
we are all concerned about. Mr Davidson, you talked about these
people at the top of organisations who were worried about confidentiality.
You mentioned people of calibre just waiting to be approached,
and so on. What difference will the regulations make that are
currently out for consultation, requiring full disclosure of the
pay and perks of local authority chief executives and senior people,
and, similarly, in those other areas of the public sector—NHS
foundation trusts that we have already spoken about—what
difference would openness and full transparency make to the market?
Mr Davidson: The short answer
is none whatsoever.
Q126 Mr Prentice: I do not believe
that.
Mr Davidson: None whatsoever,
if you are talking about detailing remuneration. I think there
is no difficulty at all. Personally, I think absolutely philosophically
and generally there should be openness about what people get paid
in those situations: it is public money fundamentally. The point
of confidentiality I was alluding to was about applying for a
job and the detail being leaked that you are applying for a job.
Q127 Mr Prentice: The Government
is going to bring in these new regulations and full disclosure
because the Government believes, ministers believe, it will depress
this relentless increase in chief executives' salaries in local
government. You are shaking your head, Mr Davidson. I wonder what
the rest of you think. Does disclosure tend to depress the increase
in salaries?
Mr Evans: I think local government
is probably out of kilter with some other parts of the public
sector such as the NHS, where there already is transparency. Even
foundation trusts, in terms of their annual reports and accounts,
would have a remuneration statement that would set out the basic
pay, the bonus arrangements, even the pension contributions and
the pension pot, effectively, of the chief executive and the executive
directors. So there already is disclosure within the NHS and some
other parts of the public sector. I am not sure whether that has
led to depression.
Q128 Mr Prentice: You are the expert;
I am not an expert. In which parts of the public sector is there
not full disclosure? We know there is not full disclosure in local
government; in which other parts?
Mr Boreham: It is mainly local
government. That is the big obvious area where there is not disclosure,
but I do not think disclosure will cause pay inflation. The reality
is that pay inflation is there. To an extent, if you publish people's
salaries, those who are paid lowly will point to those high salaries
available elsewhere and will ask for a rise, but the evidence
from both the public sector and the private sector is that decision-making
is improved where there is full transparency of what the outcomes
are.
Q129 Mr Prentice: It is not just
salaries, it is pension entitlement, it is perks; it is the whole
package.
Mr Boreham: The whole thing, yes.
Q130 Mr Prentice: Life will just
continue as before once all this stuff is published. Are you trying
to tell me the Taxpayers Alliance, and people like that, are not
going to collate that information, bring it together, publish
it, campaign on it and write to Members of Parliament?
Mr Boreham: That is my point.
If the outcome of remuneration decisions is transparent, then
remuneration committees who are making those decisions will have
regard to how those decisions are perceived by the public, by
voters, by the people who use their services. So, on the whole,
I agree with you: the totality of the package is absolutely helpful.
Mr Johnson: And because it opens
up accountability more clearly, it will be a cap—not a cap
but it will be something that restricts wage inflation.
Mr Boreham: It is very difficult,
if you are a local authority, to go out and set the highest local
authority chief executive salary in the country, because that
will be immediately picked up on and the remuneration committee
will be asked to justify that, so you would have to have a really
clear reason for doing that.
Q131 Chairman: You are saying, though,
that a perverse effect would be that people would see that other
people are getting more than they were getting and then want more.
Mr Boreham: There is definitely
an element of that. I am not going to pretend to you that transparency
will not cause that to happen, because we have seen that in the
private sector, but the reality is that where there is no transparency
pay levels tend to be higher. If you look around Europe, the country
in Europe that has the highest pay arrangements is Switzerland,
and that is because Switzerland only started to publish last year.
Q132 Chairman: Do we have enough
transparency for quangos?
Mr Boreham: Quangos, on the whole,
make remuneration disclosures. I think they could be strengthened,
I think they could quote a figure in thousands rather than a range
of 5,000, which is neither here nor there really. They should
be clear about perks that are available, and pensions.
Q133 Chairman: So we could have a
standard disclosure regime across the public sector?
Mr Boreham: I think that would
be helpful. I am not sure I would want to see the 15-page disclosure
that you see in the FTSE 100 remuneration reports, but, yes, if
we could come up with some baseline transparency that applied
for all public funded bodies, I think everybody would be happy
about that.
Q134 Mr Prentice: I have got this
article in front of me by Clare Fox. She is the woman who runs
the Institute of Ideas. She spends all her time thinking!
Mr Davidson: Great thoughts?
Q135 Mr Prentice: She is talking
about this and she describes attacking high council salaries as
merely feeding the demonisation of ambition, "The anti-fat
cat rhetoric inevitably feeds the demonisation of ambition".
What do you think about that thought? Does it? You have not thought
about it?
Mr Johnson: No, I think it is
close to nonsense actually. In terms of demonisation of ambition,
I think that is nonsense. I think evidence of the degree of disclosure
in the private sector would confirm that it is nonsense. What
I do worry about is that there is demonisation of fat cats—and
that is not the right term, obviously—demonisation of senior
executives in the public sector, when actually what they are doing,
and they are paid to do, is to deliver something that is very
important for the country. I worry enormously about that, because
I think it discourages really good people from coming into the
sector, ie "Why should I put up with that?"
Q136 Mr Prentice: We have got something
here about really good people, and I struggle with that, but Polly
Toynbee, when she came before us, talked about a maximum pay commission.
We have got a minimum pay commission; she was pressing for a maximum
pay commission, but it would just be purely advisory. What do
you think about the more general point she made about pay ratios:
that if you get the chief executive of an organisation getting
100 times, 200 times more, 400 times in the case of the chief
executive of Tesco, what the person on the check-out is getting,
then the organisation becomes, in a sense, kind of dysfunctional?
Mr Boreham: I think there is a
serious point to be made about equality of treatment within organisations.
I think the ratios test is absolute nonsense. One of the reasons
that Tesco has a very high ratio is because Tesco is large. So
the CEO at Tesco gets paid more than the CEO of a smaller retailer,
which is exactly what you would expect to happen. You would also
expect the ratio to be much higher in an organisation that has
large numbers of relatively low-skilled workers, which would be
the case in Tesco, than would be the case in an engineering-led
company, or a fund management company, or a bank. So I think the
ratios test is a completely meaningless and spurious way of assessing
this. Similarly, if you have got all your workers in Poland, for
good, sound business reasons the ratio would be worse than if
they are based in London. So ratios are garbage, but I think it
is appropriate that remuneration committees have regard to the
way that they treat their people relative to how they treat their
bosses.
Q137 Mr Prentice: What about an organisation
like the Police Service? We do not have any police officers in
Poland. You would say that the same argument applies, that it
would be absurd to determine the salary of the Metropolitan Police
Commissioner in reference to what the police constable on the
beat gets.
Mr Boreham: Yes, because I think
you would have to look at the Met and say that this is a particularly
large and complicated organisation compared to some other smaller
forces. So you would expect the person who is running the Met
to be one of the highest paid police officers in the country.
Q138 Mr Prentice: Is that the view
of you all, that there is no sense in going down this road of
looking at pay ratios within discrete organisations?
Mr Evans: I think it is interesting
to crunch the numbers in context, but I think that is all it should
be, a background context to inform the discussions. I do not think
there should be any fixed rules.
Mr Boreham: You could track the
ratio if it is a consistent organisation. If the organisation
itself does not change, then tracking the ratio may be useful
over time.
Q139 Mr Prentice: For example, the
military, or something like that?
Mr Boreham: You could check how
the pay of generals moved over time compared to the pay of privates,
because you are not going to outsource your privates to Eastern
Europe.
1 Comprehensive Performance Assessment Back
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Ev 81 Back
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