EXAMINATION
OF WITNESSES
(QUESTIONS 200-219)
MS MILLIE
BANERJEE, MR
TIM MELVILLE-ROSS
AND DR
ANNE WRIGHT
18 JUNE 2009
Q200 MR
PRENTICE: I have this delicious
quote from you, Tim, from The Independent when you were
looking back at your time at the Institute of Directors. You said
you regarded it as a personal failure that you did not make more
of an issue about the—and I am quoting here—"disproportionately
high rewards that go to people who don't deserve them." Then
you go on to say, "I'm talking about extremely high reward
packages for people running organisations which actually in the
overall scheme of things are not that difficult to run."
Now, you are the universities man, and you told us that the spectrum
goes from £100,000 to £400,000. Do you have a little
pecking order of universities in the United Kingdom, the ones
that are quite difficult to run—University College—and
the ones that are easy to run?
MR
MELVILLE-ROSS:
Yes, I do but first of all, the comments that you have managed
to find that I made some years ago were very much with reference
to the private sector.
Q201 MR
PRENTICE: I am interested in the
organisations that are difficult to run. That is the point.
MR
MELVILLE-ROSS:
Sure, absolutely. Part of the point though was to do with difficulty
in terms of creating real wealth, and I have no difficulty—just
to talk about the private sector for one moment and then I will
come back to universities—with the proposition that if you
run huge risks, you create an organisation, you build it in such
a way that you transform the lives of many of the people, substantial
rewards can flow from that and I am very happy with that. What
I am much less happy about is people who have relatively straightforward
jobs running relatively straightforward organisations being paid
packages which are quite similar to those sometimes which really,
truly entrepreneurial individuals rightly enjoy. Now let us make
that point with reference to universities. Clearly, there is,
on the face of it, a similarity between one university and another
but if you look into the difference between the major research-based
universities, like Imperial College, Oxford, Cambridge, King's
College London, UCL and so on, they are extremely complex, very
difficult to run, in terms of having to work in a world-leading
research environment, competing with United States institutions
for talent, including the Vice-Chancellor of Cambridge, for example,
who came directly from one of the Ivy League universities—I
forget which.
Q202 CHAIRMAN:
Yale.
MR
MELVILLE-ROSS:
Yale, thank you. There is this market point which is very relevant
but it is also to do with complexity, with international regard,
with being an almost unique individual in a very talented environment,
and by no stretch of the imagination would all the universities
in the UK aspire to that or claim that level of complexity or
international excellence. They do a good job but of a fundamentally
different kind, and so the rewards are commensurately lower.
Q203 MR
PRENTICE: What I take from that
is that these huge salaries that are eye-watering—£400,000,
£500,000, £600,000, £800,000 a year—go to
people running organisations that are inherently quite difficult
to run.
MR
MELVILLE-ROSS:
Yes.
Q204 MR
PRENTICE: And people should not
get these sky-high salaries if they are running an organisation
that can comfortably coast along?
MR
MELVILLE-ROSS:
Fair enough, yes.
Q205 CHAIRMAN:
You do not see in the job advertisements, do you, "This is
a relatively easy organisation to run"? It is always "challenging",
so people do not quite get the truth about this.
MR
MELVILLE-ROSS:
I think they do but I would not be influenced by that kind of
advertisement. Essentially, people pretty soon find out just how
complex an organisation is to run.
Q206 DAVID
HEYES: In this hierarchy then
Anne Wright's organisation is very easy to run, yours is quite
difficult and Millie's is phenomenally complicated.
MR
MELVILLE-ROSS:
Since I made the point, I am making one of a number of points
which determine how the salaries are set. It is an important point
but there are a great many others.
Q207 DAVID
HEYES: The reality is that all
of your organisations are equally demanding, I would guess. You
operate in different sectors, you deliver different functions,
but the demands on your chief executives, your top executives,
are of a very similar nature.
MS
BANERJEE: I
do not think I agree with that. I think different organisations
are required to do different tasks. Different organisations are
at different times in their life cycles and that has to be reflected.
I think complexity does vary and your context also varies. As
I said earlier, our organisation operates in a very complex context.
It is not a stable environment. It is fast-moving, it is changing
every day. So I do not think they are the same and if you look
at the public sector as a whole, just to broaden the debate, there
is a whole range of institutions now in the public sector which
are away from central government because in the last 10-12 years
lots of tasks have been moved out of the general public sector.
I have been around the public sector and my own experience is
that there are big differences. I have chaired smaller organisations
which have a relatively narrow remit, a small number of staff,
a relatively small budget—they are still inherently interesting
to run but they are not quite as complex as a much larger organisation.
Q208 DAVID
HEYES: Let me pursue that point
a little further with you. Would it help in your difficult job
of devising salary structures, reward systems, if there were an
independent pay review body that could cover senior executives
throughout the public sector, including your bodies? Would that
be progress?
MS
BANERJEE: That
is an interesting suggestion. I can see that people would feel
that there might be some benefit in that but I would see some
practical difficulties. This really goes back to the point I have
just made, which is that there is such a range of organisations
that you might find that the pay review body ends up making very
generalist recommendations which actually do not fit any organisations
and become slightly defeating when you get dysfunctional behaviour
of trying to find packages around what the review body says to
make sure that you can attract the right kind of people. I think
that might become very difficult because the public sector is
so diverse.
DR
WRIGHT: I do
have direct experience of two pay review bodies. I chair the schoolteachers'
one and before that for six years I was a member of the Armed
Forces pay review body. I would like to say that I admire greatly
the good practice of review bodies and I think there is a lot
of good practice that perhaps could be learnt and built on across
the public sector but on the whole, I probably would agree that
a single pay review body across the public sector, or even, let
us say, for chief executives of NDPBs, which might be another
thing that might be looked at, is probably undesirable and impractical
really, too complex. The cycle of decisions is such that it would
be a huge amount of work, would probably cost a great deal, and
I think there is a value that one has to recognise of governance
and remuneration committees which are close to the challenge and
close to the market. Having said that, I think that there might
well be scope, as I say, for learning lessons from that, particularly
in relation to the kind of data and evidence that is provided,
which could be helpful, I think, perhaps benchmarking data, something
like that, across sectors.
MR
MELVILLE-ROSS:
I would simply say firstly, I would endorse what my colleagues
have said but I would go on to say that, certainly as far as HEFCE
is concerned, we do take account of the Senior Salaries Review
Board recommendations. You will remember the very first answer
I gave when I was talking about the different influences that
are brought to bear in determining the kind of package that we
come up with.
Q209 DAVID
HEYES: The SSRB[3]
has a fairly narrow remit, does it not? What I am suggesting is
something that would have a much broader scope.
MR
MELVILLE-ROSS:
The broader it is, the more complex the issues you have to address.
We have to recognise that, I am afraid. We may not like it but
we are operating, even in the public sector, in a market environment
and these influences have to be taken into account. The more you,
in a sense, with a small "l", legislate for pay, the
more difficult it is to accommodate some of the influences which
I referred to earlier.
Q210 DAVID
HEYES: Could there be a role for
such a body if it were advisory, if it were to do, as you have
suggested, the benchmarking, for instance, that would help to
bring some more order and more balance to these very disparate
decisions that you need to make?
DR
WRIGHT: I would
think so. It might not be a body as we know, the pay review bodies
at the moment. It might be, for example, the pay review bodies,
in my view are very well served by the independent secretariat
in the Office of Manpower Economics, which provides a good deal
of the data that we use. It might be possible—I do not know—to
have something like that or to extend that so that there was this
co-ordinated data available, perhaps in families of bodies. These
are different types of bodies, different markets, regulators and
so on. Perhaps there might be something there that would help
us, to add to the support and advice we have already.
MS
BANERJEE: We
do take account of data that is available when we set our salaries.
One of the pieces of data we look at is what the pay review bodies
are saying. This year, for instance, the Civil Service review
body is suggesting, I think, a 1.2% rise. Our rise is nil. So
yes, we have taken account of what they said but we have decided
independently that nobody is going to get a pay rise this year
in Ofcom, and that is the decision we have made. But we do take
account of the data and we also, of course, look at what is happening
in the marketplace that we regulate.
Q211 MR
WALKER: Bonuses. I have always
been in jobs where the bonus was keeping the job if you performed,
but, clearly, I have worked in a different environment to most
of you. David Eastwood, Chief Executive of HEFCE, received a bonus
payment of up to 10%. Is that a cap of 10%?
MR
MELVILLE-ROSS:
Yes.
Q212 MR
WALKER: How many times have you
not paid the bonus?
MR
MELVILLE-ROSS:
He was paid it twice because he was with the organisation just
for two years.
Q213 MR
WALKER: What I think we need to
establish is, are these real bonuses or are these just part of
the salary and they are always paid bonuses? You will always pay
the bonus, will you not?
MR
MELVILLE-ROSS:
No, no, absolutely not. The maximum is 10%, for a start. Secondly,
there is a sliding scale of achievement, outstanding achievement,
excellent achievement, and so on, down, and a whole series of
objectives which I as Chair of the organisation have to evaluate
the Chief Executive's performance against. For example, quite
a lot of this is inevitably subjective because a lot of his objectives
are to do with relationships with government departments, relationships
with the sector and so on, but we work as hard as we can to introduce
quantified objectives, the organisation's key performance indicators,
into the way the bonus is determined and, if those are not achieved,
and if there is a judgement that the qualitative elements of the
bonus scheme have not been achieved, David would not have got
anything like 10%.
Q214 MR
WALKER: How long has HEFCE been
around for?
MR
MELVILLE-ROSS:
Since the early 1990s. It was the successor to the University
Grants Commission.
Q215 MR
WALKER: How long have bonuses
been around for?
MR
MELVILLE-ROSS:
I do not know.
Q216 MR
WALKER: I think what would be
very helpful is if you could provide the Committee with a note
showing for each year what the maximum bonus that could be earned
was and how much of that bonus was paid, because then we can ascertain
whether it really is a bonus or just part of the salary. Can I
ask the same question of you: how many times, in your experience
of Ofcom, has the maximum or near-maximum bonus not been achieved?
MS
BANERJEE: I
cannot tell you offhand but I can certainly give you a note to
that effect. My memory is that there were several. We have only
been there for five years and there have been times when we have
not paid the maximum but, as Tim has said, we have a very robust
process on setting the objectives and then reviewing the objectives,
and we make an independent decision on whether the bonus is achieved
or not and we do not make a payment of the bonus on the basis
that it is part of the salary. This year none of our senior team
are getting a bonus because they themselves said that they would
like to forego their bonus.
Q217 MR
WALKER: This year is a special
year because we have a recession. I understand that as soon as
the leader of my party made a statement on pay, you froze pay
at Ofcom. It was shortly after. I am sure it was just a coincidence.
MS
BANERJEE: No,
we decided that nobody in Ofcom would get a pay rise this year
as part of a Remuneration Committee exercise taking into account
what was happening in our industry and taking into account affordability
and all the other issues that we normally do.
Q218 MR
WALKER: I think what we actually
need from all three witnesses is the details of your bonus scheme
and how it is paid out, because I think there is genuine concern.
The public are concerned about lots of things, and we are not
in a very strong position as Members of Parliament to be gruelling
anyone at the moment but there is concern over bonus payments
because many bonus payments look like they are contractual as
opposed to genuinely being earned for outstanding performance.
Mr Melville-Ross, you have experience of the City—is that
right? Do you have a finance/City background or have I got that
totally wrong?
MR
MELVILLE-ROSS:
Go on anyway.
Q219 MR
WALKER: We talk about the war
for talent and my particular bugbear is the Financial Services
Authority. They are stuffed with money, absolutely gorged with
money. Hector Sants—and I could be wrong—is on over
£600,000, astronomical sums of money, yet he and his senior
management team presided over the most monumental disaster imaginable.
It was not all their fault but, quite frankly, were they playing
croquet for the year before this blew up? What were they doing
to earn their salary? We tell the taxpayer you have to pay to
get the best people, and we pay £600,000, which is, by anybody's
standards, a vast sum of money, and they are AWOL. What is your
view on that?
MR
MELVILLE-ROSS:
I am not quite sure what this has to do with public sector pay.
Q220 MR
WALKER: The FSA is public sector.
MR
MELVILLE-ROSS:
I will give you a response: because the FSA has to operate very
much in the private sector. The senior people employed by the
FSA are from the banking sector.
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