Examination of Witnesses (180-189)
MR PETER
BOREHAM, MR
DAVID EVANS,
MR CHRISTOPHER
JOHNSON AND
MR HAMISH
DAVIDSON
21 MAY 2009
Q180 Mr Prentice: Who would be on
these shadow boards? Could I get on the shadow board of the Royal
Bank of Scotland which is a State-owned bank now? I have very
firm views about remuneration and banking.
Mr Boreham: I am sure UKFI[3]
would be delighted to hear them.
Mr Johnson: I think a shadow process
is a good process for giving people exposure, helping them to
develop experience and widening mechanisms for doing that but
I think you still have to be really clear about where accountability
sits. I do not think the shadow board proposition is about somehow
fuzzing or sharing accountability. Accountability still sits with
the remuneration committee rather than the shadow remuneration
committee.
Q181 Kelvin Hopkins: I am worried
about this word "performance". My experience, certainly
in the Health Service in my region, is that performance is always
about money and cost and not about lives and care. We have moved
from a world where we were paid a salary and we were expected
to work because we were driven by the public service ethos, public
responsibility and a sense of pride in what we did. We are now
moving towards a world where, if you do it well, you get a bit
of extra cash, and if you save a bit in the process you get a
bit more cash. This is not the world I want to live in. I may
be old fashioned but the world I used to know where you got a
salary for the job and we were expected to do it well and had
a pride in doing it for that salary seems to have been marginalised.
Mr Boreham: The point is that
salaries then were much smaller. If we were paying NHS chief executives
£100,000 rather than £200,000 then your argument would
have weight. If we are paying them £200,000, I believe some
of that should be linked to performance.
Mr Johnson: It is very important
to be clear about how one defines performance. The best performance
management systems I have seen in both the public and the private
sector are much more rounded than you describe in terms of what
elements of performance people are being held to account for.
It is the quality of delivery as well as the cost of delivery
and not just the cost. Secondly, I think the good systems also
focus very strongly on the behaviour of executives and how they
do their job, not just the performance they deliver but the manner
in which they do it and whether they deliver on it and do their
jobs in a way that is consistent with the values of the organisation.
Q182 Mr Prentice: That is a key point.
In the private sector we are told that people require huge sums
of money to deliver shareholder value. What does shareholder value
mean? It means regular big dividends to the shareholders but maybe
there are other considerations like retaining profit, putting
it into research and developing products for the future.
Mr Boreham: Shareholder value
should include all of those things. Shareholder value is a forward
looking measure. If you have a business that is failing to invest
in the future, failing to manage its people properly and develop
talent, failing to interact properly with customers then the analysts
in the City of London will write down the value of that share,
shareholder value will be destroyed and those people will not
receive those bonuses.
Q183 Chairman: On your point, people
not sharing the values of the organisation and therefore getting
marked down in performance terms, who decides that?
Mr Johnson: The senior team of
an organisation would work through what the values of the organisation
are and then that becomes the requirement. The line manager is
an important part of the judgment about whether an individual
has delivered to that. If you are talking about the chief executive,
then you are looking at the Chair and the board as key players
in determining whether the chief executive has not only delivered
but has exemplified the values of the organisation.
Mr Boreham: In the private sector,
which is where I do most of my work, the key role of the remuneration
committee is about performance management of the organisation
and the chief executive.
Q184 Chairman: We could do much more
in the public sector. We know the Government is taking a lot more
interest in these issues at the moment which is the point about
transparency at local government level and so on. It said it is
going to do a first-principles review of remuneration packages
for NDPB chief executives. In very short terms, is this a good
development?
Mr Boreham: Yes, because NDPB
chief executives and non-executives' pay is all over the place.
If you were trying to look at how it should be, it should be related
to how big is this organisation, how complicated, to what level
do we need commercial experience in those kinds of roles and to
what extent has responsibility been devolved to those bodies but
when you track those factors you cannot translate that into the
differentials of pay.
Mr Davidson: I would agree with
that totally based on the experience of going in and talking to
different departments about the organisation's response. There
is no coherence of any kind.
Mr Johnson: I fully agree. My
only qualification is I would like to see that kind of work done
more broadly.
Q185 Chairman: Could I finish by
asking that in your memorandum to us[4]
you gave us some very helpful recommendations particularly those
on governance. I want to see if we have assent to these sorts
of things. "An individual review body should advise on the
reward principles and provide guidance to national and local government
as appropriate for the different parts of the public sector."
The proposition is an independent review body to lay down the
principles for different areas.
Mr Boreham: If it was principles-based
rather than laying down particular salaries, that would be very
helpful. In the private sector we have the Association of British
Insurers and the National Association of Pension Funds playing
exactly that role.
Q186 Chairman: So there is assent
to that. "Executive reward decisions, policy and application
to individuals should be made through remuneration committees
that include independent members and report to ministers or authority
members or boards as appropriate to each organisation." That
model of remuneration committee of independent members, is that
something that people assent to?
Mr Boreham: Yes.
Chairman: I think we have agreed on this
already: "Executive rewards should be published in annual
reports by analogy with requirements for public companies."
We have said yes to that. Is there anything you wanted to say
to us?
Q187 Mr Prentice: Did you feel uncomfortable
disclosing your salaries to us today?
Mr Johnson: I was quite careful
not to say precisely what my salary is from Mercer because I know
Mercer prefers that information is between the organisation and
the individual.
Q188 Mr Prentice: Do you think it
would be better, and this is a point that Polly Toynbee made to
us before, if everyone was not so uptight about what they got
paid and they just put it into the public arena?
Mr Boreham: I do not think there
is a public interest in what we as private employees of private
organisations are paid. There is public interest legitimately
in people who are running public organisations. There is a legitimate
public interest in people who are running listed companies with
diverse boards of shareholders. In a privately owned company with
private employees, no, I do not think my pay is in the public
interest.
Q189 Chairman: Is there anything
we have not asked?
Mr Davidson: I would hope that
in the eventual report you produce that you will look at the whole
supply issue of candidates which I do feel is a significant factor
in the reflection on salaries. It may too easily get missed.
Mr Johnson: I endorse that. The
recruitment, the development, the management and the retention
of talent is the fundamental driver for how the public sector
thinks about reward.
Mr Boreham: It is a perceived
shortage of talent that drives salaries up in both the public
and private sector and some of it, as Hamish has suggested, is
perceived rather than real.
Chairman: That is a very important point
for us. We have had some vigorous exchange but I am afraid that
is what we do. You have responded extremely well. Could I say
you have been extremely helpful to us and it is a pleasure to
talk to people who actually know what they are talking about.
Thank you very much indeed.
3 UK Financial Investments Limited Back
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