18 JUNE 2009
PRENTICE: But you would like to
see a situation where you, or the Kelly Committee, would just
look at MPs' remuneration in the round and that MPs should just
course, you have the sovereign power to do anything, so you could
always take it back if you were not satisfied, but I think what
we have said is that when it comes to remuneration matters, say
in determining pay, the pensions (in consultation with the pension
trustees), the rate (whatever is the new expenses regime), insofar
as maybe from time to time they need to be priced and up-rated,
our body would be well placed to do something like that. I think
that we are standing ready with some past experience to help constructively
with the reforms that we know you are most anxious to have introduced.
Some people are arguing that the allowance issue somehow has to
be compressed into the pay issue. Surely the pay issue and the
allowance issue are just separate issues?
think they are separate issues. Yes, they are; absolutely. We
have said in the past on MPs' pay (and it is almost politically
very difficult to increase it, as we have found over the years),
in our view, MPs' pay is 10 to 15% lower than it should be.
PRENTICE: Could you repeat that
has been 10 to 15% lower, in our view, and we have said that in
our reports. Indeed, in our past two reports we recommended increases
of £650 a year on top of the other increases, which the MPs
rejected. There is a degree of underpayment, in our view, but
it is always going to be difficult to address this under the present
want to be nice to you, of course, but let us resist the temptation
to go further down that route.
MORGAN: I was interested in your
body. It is made up of 10 people, is it?
are 10 of us who are members.
MORGAN: What sort of range of
experience and diversity do those 10 have?
has long experience of senior remuneration management and advice
in the private sector. We have professors who are labour economists;
we have businessmen, people who have been HR directors in companies.
I have been the chief executive in a number of companies. It is
a good mix of skills and expertise coming together.
MORGAN: Are there any women?
we do not have any women currently. We had two, and they came
to the end of their term. We have a very open process of recruitment,
supervised by a representative of the Office of the Commissioner
for Public Appointments, who for the last exercise was a woman.
It happened in this case that they were all men who were successful.
It was not our choice; that was the way it came out. This is a
MORGAN: In terms of the way you
make decisions, do you often have disagreements within the decision-making
process where you would strongly disagree about what you are going
have had robust discussions.
vigorously. We have not ever had to take it to a vote. We have
not had a minority report. We have managed to try to get a consensus,
and we work hard to get that. We listen very carefully to all
the points that are made and they are different but, in the end,
I think there is a general acceptance that what is important is
to produce a report at the end of the day which is published,
it is a Command Paper laid before Parliament, and really we have
a duty to come up with a set of proposals that are soundly based,
evidence-based and well argued, and that is what we have tried
to do over the years.
FLYNN: There are 194 public workers
who receive higher salaries than the Prime Minister. In Wales
there are, I believe, six people working in the Welsh Assembly
who receive higher salaries than the First Minister there. I had
an extraordinary answer from someone sitting here a short while
ago about why this should be and was this a reasonable situation
to be in. Presumably the Prime Minister would have the highest
salary of all. The answer I had back was that being Prime Minister
was a springboard for getting a far better retirement salary,
which is a very interesting concept. Do you not think this is
proof that things have got out of kilter when this pressure is
on to raise salaries and the people involved, like the head hunters,
are contributing to this and there is a whole process going on
which is inevitably leading to the gap between average salaries
and top salaries becoming greater, and the example of the Prime
Minister's salary is a striking one?
that is something that, in fact, we have commented on in the past.
I think it is fair to say that the political world seems to be
subject to its own salary discount by virtue of what you do. For
example, we looked at how the Prime Minister's salary and MPs'
salaries compare with other countries and we produced this. In
fact, you do very well by international comparisons, and when
we looked at this, the Prime Minister's pay was second only to
the President of the United States. He was paid more than all
the other heads of government. The position may have changed since
then because of the value of the pound. So that seems to be a
feature. Certainly it is the case that if you look at, say, what
permanent secretaries get paid, permanent secretaries get paid
more than the Prime Minister and other people in the public sector,
and in response to the argument, "Should we not use the Prime
Minister's salary as the cap, so nobody should get paid more than
that?", we think that that would not be a good idea. Besides
which, there is the risk that because Prime Ministers are always
very parsimonious about their own increases, that could have an
adverse effect on others if there was a linkage, as the Prime
Minister's pay is not objectively linked to the value of his job
in relation to comparators because there is this political overlay,
at the end of the day, in the decision.
FLYNN: This is an argument that
goes back to the time of Plato about the guardians. These people
who are taking these decisions should have the public interests
at heart, but the position now is we have created a situation
where people taking jobs as top civil servants, generals, admirals,
prime ministers, ministers, are in such a position that their
retirement jobtheir job when they leave the serviceis
likely to be more attractive to them than the job they are actually
doing in what should be the top jobs. There is a grave danger
that they can distort their decision-making in order to feather
their nest for a future retirement job, and they could be taking
the wrong decisions while they are taking those jobs. Does it
not distort the whole idea of having people in these top salaries
who should be disinterested from their personal salaries and certainly
free from any temptation to take decisions that are going to give
them rewards for the future?
answer to that hypothesis is you should pay them a lot more so
they do not need to take those amounts of money when they retire,
like Tim Melville-Ross, who said he does not need to be paid as
Chairman of his education trust because he has earned lots of
money in the private sector.
FLYNN: I know what the position
was before, but I think it is unique. There are nearly 200 people
who are earning more than the Prime Minister. The Prime Minister's
should surely be the top salary.
but I think this comes to the heart of one of the issues. It is
about pay markets, and what we are looking at is evidence of how
you attract and retain people. There is a market for MPs, people
in Parliament, which is hierarchical, in terms of salary, starting
with an MP and moving up through a committee chairman, minister
and then to the Prime Minister, and the issue about MPs' pay is
how can you attract the right people to come and do the job? Well,
give them the right sort of salary for that. If you look at judges,
for example, the pay market for judges: they are senior lawyers,
barristers and solicitors, many of whom earn a million pounds
a year; so there are different pay markets. The military has its
own pay market. As we discussed earlier, the NHS has a disparate
FLYNN: In the military, the less
risk you have the greater your salary. The further you go up the
pay scale in the military, the less likely you are to be killed
on the battlefield. There does seem to be a distinction there.
and tell that to the two and three stars who come before us.
FLYNN: I would be delighted to.
I make a general point about our approach to pay? I have explained
how we get various sources of evidence and so on but, I think,
when it comes to the point, our approach to pay is to pay at the
lower end of what would be justified and, in fact, our view is
to pay the minimum necessary to get people of the right quality
in a sustainable position. Having regard to recruitment and retention,
these are the key indicators that we look at in forming a view
at the end of the day; so we do not consciously set out to pay
a premium. In some cases there are premium payments made where,
notwithstanding the pay ranges that we recommend, the Civil Service
might go and recruit somebody with particular skills and pay them
a much higher salary. For example, in the Olympics, the team that
are managing the top Olympics programme are paid well ahead of
the going rates, but there is a special case for this because
you are looking for people of outstanding ability and expertise
to do this. Outside our normal recruitment there is scope for
going into the market and paying a premium.
FLYNN: Is there evidence that
these stratospheric salaries produce better outcomes in the decisions
that they make? We had a striking example in the financial services
sector from Charles Walker, and there are many other examples,
but is there real proof there that the more you pay the better
decisions you will have?
course those who employ them have to take that view. If you take
the Civil Service (and I will come on to the incentive schemes),
there are for these people sometimes very specific objectives
and targets that they have to achieve to justify their recruitment
for the kind of jobs they are in. We have been quite vocal, in
general, about looking carefully at the number of times the Civil
Service find the need to go outside the pay systems and recruit
more highly paid people. This is a big issue currently, the dual
market, if you like, and certainly a lot of civil servants internally,
who have come up through the system, are unhappy with the fact
that there are other people coming from outside into senior positions
who get paid a lot more, and we have challenged this and we have
pushed hard to say that this has got to be objectively based,
it has got to be evidence-based, it has got to be transparent.
In fact we track it and we push the Cabinet Secretary when he
comes to see us, and we are very glad to see in the Normington
review of the Senior Civil Service there is an acceptance that
there has got to be greater rigor and transparency there and there
has got to be greater fairness in treating the internal applicant
for a job more equally than the external applicant for the same
job. In the past it was rather biased. We have been pushing. We
are not saying everybody should be paid at the high level, because
there has always got to be scope for going to the outside market
and paying the premium rates, but in doing so it has got to be
fair, transparent and objectively based.
answer your question precisely, nobody makes bad decisions because
they are badly paid. They leave if they are badly paid.
HOPKINS: My apologies for being
late. There is one particular question I am concerned about, and
that is on performance-related pay. I hope it has not been covered
already. In your paper submitted to us before the meeting Executive
Pay in the Public Sector, written evidence by SSRB, you question
"is the balance right between executive pay and benefits
such as bonuses?" Pensions sit on one side but, as regards
bonuses and PRP, do you think that balance is right, because,
I may say, I am deeply sceptical about PRP?
are unashamedly in support of incentive performance bonuses. We
support it through our own background of having seen it work and,
also, the concept of having a higher proportion of variable pay
which is performance-based, we think, is a good situation, as
a general statement. Having said that, we think that there is
considerable scope for improvement in the way things are organised.
Bonuses for the senior civil servants, on average last year were
8.6%, and these are awarded according to the appraisals and assessments
of the individuals, and they range from nothing to 15%, roughly,
which would be a top award, but within the average of the 8.6.
We have urged the Cabinet Secretary and his team to make sure
that they can improve the quality and rigor of the system that
gives rise to these payments, and, indeed, in our last report
we did not recommend an increase in the bonus pot for the year
ahead, 2009, so it remains at 8.6. Although, in principle, the
Government's intention is that that should rise to 10% on average
by 2011 but, actually, there was no increase last year. For the
permanent secretaries, they have the same bonus scheme of 8.6%,
and we make awards on an individual permanent secretary basis
according to their performance, and that is backed up by evidence
but, as I mentioned earlier, the permanent secretaries this year
have waived their bonuses in respect of last year in recognition
of the current position that we are in.
HOPKINS: There are many areas
in the private sector and, indeed, the public sector where there
are no bonuses, no PRP: people are paid a salary and expected
to do the job, and they do it to the best of their ability, accepting
that salary. There is even an argument in some areas, even in
the private sector, that PRP is a demoralising factor, and actually
in some areas of the private sector they found that productivity
went down with PRP instead of up.
have different points of view, in general. There is a lot of support
for this, and certainly it was put to us in evidence and backed
up by the Normington Review, that the principle of performance-related
pay is a good one and one, in fact, that they want to introduce
further. In fact, not only are there the bonus arrangements within
the Civil Service, which by private sector standards are quite
modest, to be honest the average bonus payments for the Civil
Service was something like six and a half thousand, whereas the
average in the private sector was 35,000. There is quite a big
spread of payments there. That is the reality, but the intention
is to make it more rigorous, to make it more meaningful, and not
only is the bonus subject to performance but the basic pay itself
is performance-based. Just to explain, in the Senior Civil Service
there are four categories of performance, and people are allocated
to these four categories: the bottom category, which has got five
to 10% in it, do not get any pay increase and the higher ends
would get more. So even the base pay is related to performance,
all within the average pay budget, which we determine overall.
HOPKINS: I am afraid it looks
to me, and I think to many other people as well, that there are
people in the bonus culture environment who are just scratching
each other's backs and rewarding each other with bonuses: "We
live in the bonus culture, so we will make sure that other people
get bonuses as well." Someone with average earnings of £23,000
a year looks at this and feels resentful, because they do not
get such bonuses. If there was simply a salary for the job and
they had to do the best job possible within their salary, average
earners would understand that.
are various jobs at that sort of level that get piece rates and
get bonuses for productivity, and all sorts of other things like
that which are very similar, but I think actually the issue about
bonuses is how is the objective setting done? What is the bonus
for? What are you trying to achieve with it? If you have a bonus
structure, does it actually achieve those things which you are
seeking? That comes down to a lot of work needs to be put into
HOPKINS: One final question. Punching
out widgets on a low wage and getting piece work pay for that
is one thing. When you are the chief executive of a hospital trust
and you are being judged on financial performance, which is, I
think, what most of them are judged on these days, the fact that
rather large numbers of people are dying in that hospital and
getting terrible diseases is sometimes overlooked. There has been
a recent glaring example of just this, in this bonus culture driven
by financial concerns.
the bonus is narrow enough just to look at financial objectives,
you are absolutely right.
Have you thought about applying the principle of performance-related
pay to Members of Parliament? If you are unashamed enthusiasts
for it, why not apply to it MPs as well?
may be some circumstances where it is not appropriate. For example,
if you take the judiciary, there is a strong view and we are persuaded
that that would not be an appropriate world to have performance-related
pay, simply because, I think, there is a feeling that it might
give rise to behaviours that would be inappropriate. Certainly
there is a very strong feeling about it. That is not to say that
there should not be targets for efficiency in back office activities,
and so on, but the judges themselves, I think, feel very strongly
that this is not appropriate. Although we have a general enthusiasm
for it, there may be differences.
What about differential pay? A lot of MPs have other jobs as well.
Why not have different pay bands: those who are full-time, those
who are part-time?
would agree with you that this is a reasonable thing to do. For
example, if you are a Member of Parliament and you are a member
of the Northern Ireland Assembly, for example, your Assembly pay
is abated by two-thirds, so there is already a principle of abatement
if you are in receipt of an MP's pay or Assembly Member's pay.
It might be that that sort of concept might have a further potential.
PRENTICE: Do the people at the
very top of organisations necessarily have the most difficult
jobs? I was interested in what you were saying earlier about job
sizing. A few years ago, when Andrew Turnbull was Cabinet Secretary
and head of the Home Civil Service, I asked him, "What do
you run?", and he said, "I do not actually run anything."
So presumably he got paid his Cabinet Secretary salary for horizon
scanning, and all that kind of stuff, but not actually running
things. I am interested in what you mean when you say job sizing:
because the number two, or the number three, or the number six
in an organisation actually may be doing a more demanding job
than the figurehead at the top.
do not think the Cabinet Secretary is exactly a figurehead, if
you look at the range of his job.