Public Sector Pay
Item 2 is evidence on public sector pay from Will Hutton of Hertford College, the University of Oxford, who is the author of the “Hutton Review of Fair Pay in the public sector”. I welcome Mr Hutton to our meeting and invite him to make a short opening statement before we proceed to questions.
Will Hutton (University of Oxford)
I am not sure that there is a need to say much. I presume that members have read the paper. Would it be helpful if I were to say a few words about the thinking behind it and where I think the Government in London has got to with it?
Yes.
The background is that, very early on after the formation of the coalition Government in May 2010—in fact, on day 1 or 2 of its being formed—David Cameron asked me whether I would look at the case for capping top pay in the public sector at a multiple of 20 times the pay of the lowest-paid person on the pay spine, whether that could be workable and, interestingly, whether it could become a principle to inform private sector pay. It quickly became obvious that the number of people in the public sector who would be captured by that was in single figures and that although there were worrying trends in top people’s pay in the public sector, they were not quite the trends that people had thought they would be.
I rejected the 20:1 idea because I thought that the approach would be too arbitrary, but I came down in favour of tracking and monitoring pay multiples and of systematically publishing them as part of increased transparency. I also came down in favour in particular of the notion of “earn back”: people who run organisations—this should be mandatory for people on new contracts and voluntary for existing postholders—should put a worthwhile proportion of their pay at risk to be earned back using a balanced scorecard of performance measures. They should have a sense, from conversations with those to whom they are accountable, of what “good” looks like and what they are trying to do with the organisation. Earn back is a way of giving monetary expression to the deeper proposition that top public officials should have a serious conversation about what they will try to do in the year to three years ahead.
That was informed by my notions of fairness, which I had worked up in the preceding two years and published in my book, “Them and Us: Politics, Greed and Inequality—Why We Need a Fair Society”. In the book, I argue that fairness should be understood not as an applehood and mother pie—[Laughter]—sorry, motherhood and apple pie concept, but as getting one’s due deserts for one’s efforts, in proportion to one’s efforts and, in particular, to the contribution that one has made. There is a wealth of evidence from behavioural psychology, from multiple experiments in social science laboratories and from our studies of history that suggests that reward should be proportionate to contribution. One of the reasons why justice is represented by scales in so many civilisations is that people are trying to make the tariff of punishment proportionate to the crime.
The notion of due desert is profoundly embedded. We even know in which parts of the brain the sensibility exists: it is in the front part, along with the capacity to learn language. The notion of due desert and proportionality is a basic human instinct.
Human beings also recognise the role of luck in human affairs. If someone works on their good luck and their natural advantages, they should get the advantage. Brute bad luck—circumstantial luck—or brute good luck are things that we feel should be either mitigated or shared in. One of the reasons why people get so anxious about the bonus culture is the strongly held view that bonuses, particularly in financial services, are not earned by hard work, effort or any sense of contribution, but are the result of someone having the brute good luck to be in the right industry at the right time and to hit the jackpot, thereby getting a vastly disproportionate reward for their contribution. That is felt to be unfair.
That does not mean that the notion of earned bonus or earned incentive is felt to be unfair. Early in my inquiry, I pointed to a lot of evidence across the public sector of the public thinking that a great teacher or chief constable is worth his or her hire. I pointed to the public reaction to the case of Mark Elms, who ran Tidemill primary school in south-east London and was involved with a group of schools. Members might recall that he got a one-off bonus that took his remuneration in a single year to close to £200,000. Although some people said that that was extraordinarily unfair, because they assumed that the bonus was unearned—like a banker’s bonus—the parents of the children who went to the school and the schools that he supported as part of his job thought that he had done a brilliant turnaround job and was more than worth his hire. Similarly, the chief constable of Cleveland Police, who earned £200,000, had reduced the crime rate in Cleveland to such an extent that when “Panorama” went to Cleveland the programme could not find a single person who would come on camera to criticise the remuneration.
I argue for the notion of earn back. Postholders at the top of the public sector should have the conversation about what “good” looks like. If they perform, they should earn back all of their salary, and if they overperform, they should have a non-consolidated uplift that is commensurate with the amount of salary that they put at risk. I think that that would fair, and I think that the British—and Scottish—public would regard it as being fair. That would not be the same as bank bonuses.
I also argued for radical reform of remuneration committees. Despite what the Secretary of State for Business, Innovation and Skills said on Monday about the private sector, in the public sector there is a strong case for a member of staff to be represented on the remuneration committee that deliberates on pay.
The Government welcomed my report and a team that has been set up at the Cabinet Office—with the backing of the Prime Minister, Francis Maude and, I believe, Oliver Letwin—has been doing extensive consultation work on whether my proposals will be accepted in part or in full and, if they are accepted, how they can be rolled out. I am told that an announcement will be made in July and that the Government will accept pretty much all my recommendations—that is where the conversation is now, although it may change between now and July.
I am told that the Government will certainly accept the case for tracking multiples—the ratio of top pay to median pay—in public sector organisations, and that everyone will be required to publish a single number. There was a trace of that thinking in Vince Cable’s statement on Monday; he argued that one figure should be published for private sector chief executive officers’ remuneration, which is one of my recommendations.
The pay ratio should be tracked over five years. Citizens should be able to see whether it is stable, declining or rising and they should be able to get good answers about why it does what it does. They should be able to make comparisons between the universities sector and local authorities, for example, to determine whether the differences in size, scope, complexity and challenge that might justify different pay multiples among different organisations are a reality. The Senior Salaries Review Body should publish the figures in a single fair-pay document. My understanding is that that is likely to be accepted, endorsed and required.
The argument rages on earn back. Many people in the Cabinet Office and the Treasury are strongly for earn back, but there is some pushing back against that because if there is no compensating uplift, earn back would, in effect, be a fine on public sector leaders. Suddenly to be required to earn back 10 per cent of their salary would feel like a fine to people who run local authorities or universities, and are paid £150,000 or £200,000 a year, even though it would actually be an attempt to establish the parameters for them to do what was wanted of them. Under such a system they, their rem com and those around them would know why the person did what they did, which would make them eligible for a non-consolidated uplift that would be symmetrical with the amount of money that they had put at risk. At the moment, it is between 40 and 60 per cent likely that earn back will be accepted. Staff being on rem coms is a possibility, not a probability.
Another one of my recommendations is that the talent pool in the public sector should be enlarged, from which we can recruit and cross-fertilise among parts of the public sector. I was alarmed by how many people in local government, for example, come from the local government gene pool and how many chief constables come from the chief constable gene pool. There is little cross-fertilisation. There should be a common entry for young graduates and a two or three-year period in which they could work across a range of public departments to give them a range of experience before they settle on one. That would also enable and equip them to make other moves later in their careers.
One of the reasons why there were the beginnings of a pay arms race in the Russell group of universities and parts of local government was that the gene pool from which they were recruiting and the shortlists from which they were able to nominate were so small. Enlargement of that gene pool would be another way of trying to take some of the heat out of the situation.
10:15
Last but not least, if earn back were adopted by public sector leaders, people in the middle of organisations could, by volunteering to put part of their pay at risk, show that they were up for public-sector performance assessment. The alpha, carnivore, risk-taking and entrepreneurial people in public officialdom would have a means of signalling to the hierarchy what kind of people they are, in a way that does not exist at the minute. That would enable public sector performance assessment.
I finish by saying that there is now common ground among the three political parties—although, in Scotland, I should say the four political parties—that a form of responsible capitalism is what we want in Britain and in Scotland. In any concept of responsible capitalism, there is co-dependency between the public and private sectors. You cannot do responsible capitalism without a performance-oriented public sector—one that embraces change and performance and which thereby earns legitimacy. I see earn back as being a fundamental way of achieving that.
Everyone knows about the semi-fiasco—the fiasco—over the Edinburgh trams. If part of the pay of the people involved had been at risk, an immediate consequence would not necessarily have been the loss of those people’s jobs—because there might have been mitigating circumstances in the whole fiasco—but the people certainly would not have earned back the money that they had put at risk. That would immediately have assured Edinburgh and Scottish citizens that penalties for cock-ups were embedded in the system. Such an assurance does not exist.
Thank you very much for that fairly comprehensive introduction. Your report is absolutely fascinating, and I know that my colleagues will have a number of questions. You have already answered some of the questions that I had intended to ask. [Laughter.]
Was my introduction too long?
No—although, judging by the laughter from my colleagues, I think that you have answered many of their questions as well.
You spent a while talking about earn back, and it is a crucial part of the report. I find the concept very interesting. How will success or failure be measured? The Scottish Government has said:
“A potential concern might be that this may push up pay from the ‘90% pay level’”
and
“there remains the question of who in the Scottish Government or other third party would be best placed and sufficiently knowledgeable to be able to comment on the performance related pay element; and this could bring the Scottish Government or other third party into conflict with the employer/employee contractual relationship”.
The paragraph ends:
“These issues are of course not specific to Scotland.”
In the private sector, it can always be argued that the performance of a chief executive can be measured by the increasing value of shares and by company growth. How can performance be measured in the public sector? You talked about balance and suggested that we should consider not only the case of someone losing 10 per cent of their pay, but the possibility of their having an opportunity to enhance their pay. That would be an important motivator. Will you respond to those comments from the Scottish Government?
Interestingly enough, we know that people are more risk averse than they are anxious to make money, but people would be anxious to earn their money back—that would be an even bigger incentive than getting the 10 per cent uplift. However, there has to be some symmetry. If someone is putting part of their basic pay at risk, there has to be a symmetrical opportunity for reward.
Since I wrote the report, debate has been vigorous. Some people say that any kind of attempt to do what Will Hutton is suggesting goes against the public sector ethos. They say that people in the public sector are motivated not by money but by a desire to do a good job, and that the framework should not undermine that sense of vocation and that ethos.
You asked who is equipped to make a judgment on whether someone has performed. If the situation is that there is no one, what a bloody position to be in. If no one has any idea whether or not someone who is receiving taxpayers’ pounds is doing a good job, that is a parlous situation. There jolly well should be somebody in that position.
If those who are running organisations have no idea what those to whom they are accountable think good performance looks like, all they have to go on are hunches and instincts and what they might diagnose as being the problem. However, that is not reality checked with anyone else, and you are saying that no one is in a position to reality check it. My push back against that is that if no one is able to do it, that is close to a crisis in the Scottish public sector. There should and must be someone to do that in order to give citizens some assurance that the taxpayers’ pounds are being well spent. As everyone knows, there is a legitimacy crisis in the public sector. If, as a public official, you cannot say with your hand on your heart that you are operating in a certain framework, explain what you are trying to do and that it has been described in a certain way, and explain that that is why you are being paid what you are being paid, it seems to me that you are in real trouble.
My second point relates to the public sector ethos. When I took evidence, a lot of people—particularly from the trade unions—were anxious to tell me that measuring performance in the public sector is very difficult. They said, for example, that it is difficult to measure performance in refuse collection in local government or to measure the performance of a teacher, or of an official in the department of enterprise or wherever because it is so complex, and completely different from the private sector, where all one has to do is make money.
I just do not know where to begin when I hear that kind of thing. It is as if it is harder to establish metrics of performance around refuse collection than around the complexity of running a supermarket well or delivering high-quality catalytic converters for upmarket cars—as if that is an easy thing to do, and such measurement is impossible in the public sector.
I challenge people and say, “It’s exactly the opposite”. Anyone who has run a private sector organisation knows that you have to trade the short term against the medium and long terms, and that you must balance the interests of different shareholders who have different expectations of you. Your customers have expectations of you, and so has your supply chain. You have multiple competitive challenges and all kinds of technologies and innovative possibilities that you can run with or decide not to run with. It is a highly complicated environment.
The private sector is not, as we know, particularly good at devising performance frameworks, because owners, absentee landlords and shareholders abdicate responsibility for that. However, that does not mean that it cannot or should not be done, or that it is desperately easy in the private sector and impossibly complicated in the public sector.
Most people in the public sector know very well what they should be doing from discussions with their remuneration or nomination committees, or whichever board they are accountable to. All we have to do is formalise that in a broad-brush, balanced score card of objectives and—hey, presto!—you have performance measuring, which can be quite congruent with the public sector ethos.
You will find as you take evidence that there are people who strongly sympathise with my position, and others who are strongly critical of it.
I will keep my answers very short from now on, by the way. [Laughter.]
Yes—I will have to truncate some of my questions.
I will be here until midnight. The committee members will be falling asleep.
I need to ensure that all my colleagues have an opportunity to come in at least once, and some of them will no doubt want to come in twice.
I will ask you a couple more questions. The first is on improved transparency, which is important. On bonuses, the Scottish Government says that, although the names and salary details of members of senior leadership teams are disclosed, bonus figures are not normally published because of considerations around the Data Protection Act 1998, which would come into play if there were moves to publish more than simply bonus amounts. There is a difficulty around that issue. Could you comment on it?
We live in an era of WikiLeaks and more and more transparency; that is the contemporary world. I tried to draft the part of the report that you are referring to carefully, but I think that all that you can do is to go for maximum transparency, congruent with the Data Protection Act 1998. I do not have a better answer, I am afraid. The reality is that, if you are holding a top position in the public or the private sector, details of your remuneration will get out there.
Some countries are saying, “To hell with it” and going even further than we are. Which Nordic country am I thinking of? Norway? In one of the Nordic countries, anyway, everyone has to publish their tax return. My expectation is that, if any hearing of the sort that is being held today is held in 2100, the prosecuting MSPs—[Laughter.]
Inquisitors.
Yes, “inquisitors” is a better word. I expect that, at that time, everything will be out in the open. Over time, the data protection legislation will be redesigned again and again in order to permit that. That is my instinct, anyway. I would start this journey with that expectation, while always respecting the legal position.
You said in your report that the package of recommendations must be taken as a whole, but you indicated that the UK Government might be minded to take on board some but not all of them, and the Scottish Government has issued some caveats around its acceptance of the recommendations. Could you comment on that?
I have met a few times the Cabinet Office team who are dealing with this matter and I have tried to impress on them that the effectiveness of the measures will depend on the whole being accepted—the transparency, the multiples, the publishing all in one place, earn back, the rem com and trying to increase the supply of leadership candidates via recruitment and training policy that affects them early in their careers. I think that that team has got that message, but there is an inevitable tendency for politicians to cherry pick. We shall see. I hope that the report will be implemented in full, but I am not counting any chickens.
Politicians cherry pick? Surely not.
This is not the audience to say that in front of, is it? That was not the cleverest thing I ever said. I should say that only journalists are worse.
I was really interested in the earn back idea. I am not saying that I am concerned about how it would work, but a couple of thoughts occurred to me while you were describing it. If I put them to you, you could explain why any concern that I might have would be unfounded.
None of the people in the public sector about whom you are talking works in a silo. There are political agendas to create cross-cutting work and shared services, so people who work in the public sector work with partners. Chief executives of local authorities depend heavily on the work that is done by the health service, the police require other departments to work closely with them in order to achieve their outcomes, and so on. Is there not a danger that a chief executive or senior manager in one of these positions might not meet the target that has been set for them because of failures elsewhere? Because meeting that target would be dependent on everyone driving forward to achieve the earn back, could they be punished for the failures of other people? If that were the case, someone who was on £200,000 a year of which 10 per cent was held back for them to earn back might say, “Okay, I’ll just take £180,000.” There could be a levelling down—I am reluctant to say a dumbing down—whereby people would not think it worth the effort to get the extra £20,000. If they were going to be opened up to transparency and be judged, and if other people were going to have an impact on their salary, they might just say, “I can do without the hassle.”
10:30
Those are good points. In such a situation, you must always ask the counter question: are you so happy with the status quo that you want to leave things as they are? Moving involves the risks that you have established, but standing pat also has associated risks. My judgment is that standing pat, in the current climate, poses more risks than moving. There is a lot of suspicion about the public sector and about what officials do. As we say in our report, in one YouGov poll, 25 per cent of respondents thought that top public sector officials earned more than those at the top of the private sector. In this climate, there is an awful lot of disinformation out there and there has been an awful lot of pressure on officials, who take on enormous responsibilities, to take arbitrary pay cuts. It would be much better for them to say that they will put part of their pay at risk and earn it back in the legitimate fashion that is on the table as an answer to their critics. That does not bomb-proof them, but it helps to bomb-proof them.
The BBC adopted my proposals in July and, for six months, although the BBC has had the usual bombardment of criticism, it has not been criticised about pay. With Mark Thompson likely to step down, there is a framework for making certain that his successor gets paid in a way that people widely regard as fair. The BBC has adopted a pay multiple framework, and his multiple needs to be brought into line with those of the people who report to him, as it had got out of line with them and with what the BBC had paid in the past. The BBC needed a story to tell its critics about how it pays its top person. If you talk to Chris Patten—if you ask him to give evidence to you—he will say that he regards such a framework as extraordinarily helpful. A lot of people in the public sector who are under fire say the same thing.
You ask whether someone would just not bother about the amount to be earned back. What happens if, in my language, someone has the circumstantial or brute bad luck that someone else’s actions, in this interdependent world, make it impossible for them to do their job? The performance metrics should be able to handle that. We should not reward people for being lucky enough to be in the right place at the right time and we should not penalise them for being in the wrong place at the wrong time. It is not difficult to address that, and it would all be transparent. I think that public officials would much rather be in the position of being able to say, “Hey! I put 10 per cent at risk and not only did I earn it back, I overperformed—that’s why I’ve got a £5K one-off bonus. Here are the reasons why—everybody can read about them.” If they can show the results that everyone wanted, which they have worked 70 hours a week to get, I think that—although you might be surprised—the British public would say, “Fair dos.”
It is good to see you at the committee, Mr Hutton. I want to concentrate on your ideas of fairness and the multiple, which you felt should not have a hard cap—for example, 20 times what the lowest-paid person gets. Frankly, I find it appalling that anyone can be paid 20 times the minimum amount. If a living wage is roughly £12,500 a year at the bottom, that would put the top person on £250,000. To my thinking, that is unfair—full stop. I would have thought that even a multiple of 10 times would be quite generous. Do you accept that the concepts of fairness and due desert are largely subjective? I am not clear what “due desert” means. You said that you do not think that luck should play a part, but a lot is to do with, for example, who people’s parents are, their upbringing, the school that they went to, whether they have good health and so on. Somebody who sweeps the streets can work just as hard as a chief executive but get paid a tiny fraction of what the latter gets. How do we define fairness in that context?
Good question. I have pondered long and hard on whether I was right to reject a maximum multiple of 20. It was quite a tough call. Most organisations have a span of control that has seven or eight levels from top to bottom. If you want pay bands that provide an opportunity for people to migrate up them, they need to be, say, 25 per cent higher at the top than they are at the bottom, and there should be a gap between pay band 1 and pay band 2, and so on. You can build a pyramid of pay bands quite comfortably within a 20:1 scale and you can also build in incentives.
My concern about a multiple of 20 is that it will not apply to all organisations in the public sector. There is a debate around whether we should measure according to the lowest pay or the median pay. Almost all organisations will have someone on low pay, but many organisations will have a huge bubble in the middle of the pay range, some of whom will be well paid. Other organisations will have a very flat pay shape, with lots of low-paid people and just some at the top.
Once you start considering such differences, you can quickly get into a minefield. For example, in the Solicitor General’s office, the median pay is very high and the lowest-paid person is well paid. Whether we measure it on the bottom of the pay spine or the middle, that multiple comes in at low single figures. However, at a university, for example, the lowest-paid person might be a cleaner, so the vice-chancellor will come out with a much higher multiple. We can therefore get into invidious comparisons.
That is why I decided that it was best not to have a multiple of 20 but rather to publish multiples so that comparisons can be made over time. My interest was in how the multiple has gone up. For example, why has the BBC director general’s multiple gone up from eight or nine in the 1970s to close to 20 in the early 2000s? What has happened to justify that over time? Is the organisation so much more complicated than it used to be?
Do you think that publishing the multiples will be sufficient?
No. I want them published so that the rem com, with a staff member on it, will ask some gritty questions and so that recruitment consultants, for example, can also raise the issue of the multiple. I want part of the money to be put into earn back so that it is embedded in a system of performance metric, rather than having the position whereby people can say, “Oh, this chap is performing so well that we must pay him £100,000 more.” Let us have a much more toughly nailed down system than the present one.
That is why I got to where I got to. I am slightly dismayed that people are now making the Tesco/Goldman Sachs point that I made in arguing against having a 20:1 pay cap—that Tesco will have a higher pay multiple than Goldman Sachs even though everyone at Goldman Sachs is paid much more. I went on to say that we should publish the multiple for Tesco, so that we can see how it has moved over time and can compare it with the multiple for other food retailers. That is bloody interesting. Let us do the same for Goldman Sachs. I am not particularly interested in making a comparison between Goldman Sachs and Tesco. People who are trying to protect extremely high salaries in the private sector have used the argument that I used for not having an arbitrary 20:1 ratio as an argument for having no multiples at all. I have been dismayed at the way in which that has become part of the public discourse.
On due desert, I have set out my stall. I point Mr Mason to the interim report, in the opening chapter of which I set out my ideas on due desert in seven or eight paragraphs. That will answer your question.
Thank you.
I am trying—in vain—to keep my answers short.
That is okay—it is a fascinating subject.
I want to return to earn back, which is an interesting concept and one that I instinctively support. However, there are some potentially problematic issues, the first of which is how it would be implemented, given that highly paid public sector workers already have a contract. A chief executive of a local authority or a housing association will have been offered that job at a particular salary. By introducing earn back pay, we would be altering someone’s conditions of service. If we brought it in, we could face the practical problem of its being challenged.
My second point is about benchmarking. In the public sector, we have moved away from an output-based approach to measuring success. At one time, success in local government would have been for a council to have emptied 90 per cent of its bins in a certain amount of time. We have tended to move away from that towards measuring outcomes, but it takes much longer to see whether they have been successful. It would be difficult to use an outcomes-based approach on an annual basis to work out whether people were entitled to earn back pay. Is there not a danger that you might push the measurement of success away from an outcomes-based analysis and back towards an output-based analysis?
You talk about the difference between output and outcomes. I think that you mean input rather than—
Not really. The way in which a body’s success used to be measured was that it got a certain amount of money from the taxpayer—the input—and the output was the number of things that it did in a certain period of time. Outcomes relate to what, in doing those things, an organisation does for the public good. Certainly in the public sector in Scotland, we have tended to move towards measuring not just how many bins are emptied and in what time but factors such as what the effect is on the quality of life of the citizen, which are much more difficult to measure. That would be difficult to do on an annual basis.
Yes. I have wrestled with the issue a lot. Some close friends of mine in the public sector make similar points, and I have had some pretty vigorous arguments on the subject.
My answer is similar to one that I gave to an earlier question. These dilemmas exist. What process is there for attempting an answer? At the moment, things are pretty rough and ready. You suck your finger, you put it in the air and you see which way the wind is blowing. Surely we can devise a framework that includes quantitative and qualitative measures. People who are listening might be thinking, “My God! Will’s thinking of a straitjacket of Blairite performance targets.” There are more than 200 of those in the national health service. Thankfully, we are moving away from that approach, but people might be worried that what I am proposing would take us back to it.
10:45
I tried to say over and over in the report that there should be a balanced scorecard and a maximum of five measures. Try to keep things as broad brush as possible. Do not allow yourselves to get bogged down in metrics over quality of life—if it walks like a duck and talks like a duck, it is a duck. There can be a sensible conversation with the rem com about whether things are being achieved. You are not trying to make every 1 per cent of the 10 per cent earn back due for forensic analysis. Ten per cent of what used to be people’s base pay will be put at risk, and every single pound of the earn back should not be signed off in a huge and time-consuming process. I want that to be clearly understood by citizens and leadership. The approach has to be broad brush enough not to get people into ratholes and difficulties.
That is the best that I can say.
Have you thought about the possibility of a legal challenge under people’s employment terms?
Earn back can be only for new contracts and people who volunteer. If people want to stand by their existing contracts, that is fine. Their terms and conditions cannot be unilaterally changed.
I am fascinated by the evidence so far and thank you for what you have said.
I was particularly taken by your comments on the “dialogue of the deaf” in the foreword to your report. For the benefit of those who are watching the meeting on television, I will read what you said:
“Government and the public sector are too easily regarded as an obstacle to growth and the good society. Properly organised, led and managed they are instead their handmaiden. Indeed most public servants are animated by precisely this aim.”
I completely agree with those sentiments.
You proceeded to talk about the case that has been made that it is necessary to increase pay to attract the appropriate talent into the public sector. Obviously, there is a little bit of tension between those two things. I agree that there is an element of truth in both of them, but will you comment on the implications of having to pay to attract talent into the public sector, even though it could be argued that those who are in the public sector have the public service ethos very much at heart and have a desire to improve services? With the appropriate incentivisation through earn back and other measures that you have talked about, might we encourage improved performance from within the sector and be able to recruit people from within it to the top positions?
To complicate matters, I want to talk about gain sharing. I was interested in what you said about that. I have worked in the private sector. We had performance-related bonuses, part of which related to the overall company’s performance. A certain amount relating to overall group performance was hypothecated, and a discretionary element related to personal performance. Are you thinking along those lines? Would earn back be, in effect, the profit pool that would be distributed?
Hay and PWC have done a lot of benchmarking work, which is mentioned in both the interim and final reports. People at the top of the public sector make around 55 per cent of what their private sector peers make in jobs of similar complexity and weight. Therefore, there is really a huge discount on what might be made in a private sector career. People have a chance to do some good in the public sector and there is the vocation element, but I find how few able people make public sector careers in Britain quite alarming.
I run an Oxford college and I have observed that at least a third of the sixth-form pupils in our top private schools are taught by people who do not just have Oxford and Cambridge degrees, but DPhils and so on—they are highly qualified people. Almost nobody goes into one of Britain’s 2,000 underperforming comprehensives with a degree from a Russell group university. One calculation in that is that the returns from that highly demanding work are so poor. That matters.
Consider the challenge facing the Scottish Government in the next five years. Cumulatively, departmental expenditure limits are to be cut by 18 per cent, but no one wants that to be accompanied by a comparable 18 per cent cut in delivery. That is a real challenge. If we want the best dynamic and enterprising people to be at the top of the organisations that try to deliver what the Government wants, we cannot pay them indifferent sums of money because, in the end, that starts to show.
At present, the situation is probably just about okay but, in a decade, if we consistently underpay, we will not get the able people that we want. That has happened in the United States, where there have been problems at the Securities and Exchange Commission and at the Food and Drug Administration, which simply cannot get people to regulate the drugs industry and approve drugs quickly enough because it will not pay. Posts are vacant for long spells and then, when somebody is employed, they are not good enough.
There is a co-dependency between the public and private sectors. The pharmaceutical industry might pay 10 times more than the regulators that approve the drugs, but the industry still needs its drugs to be approved if people are going to use them with confidence. If we end up paying trivial sums of money, we will get into terrible trouble. We cannot just say that we can pay everyone less than the Prime Minister and everything will be fine. We must accept that we need to pay people a certain amount and that we probably cannot afford to pay them much less than we currently pay.
That is an important finding. In effect, you say that we should resist the siren voices that we occasionally hear on the issue. You gave examples in your opening remarks involving the Cleveland police and a primary school in which you feel that the pay was justified because there was clear evidence of performance and achieving results. We need to get away from some of the public discourse on this.
The British public are not fools. If they see a top official in the public sector doing a good job, they recognise that it is not unreasonable to pay them. People know that chief executives of the FTSE 100 companies make about £4.6 million. Salaries in the public sector of £150,000, £200,000 or £250,000 are large in relation to the amount that ordinary people make, but they are much lower than what is paid at the top of the private sector these days.
Will you expand on gain sharing and say how you see that working?
I think that there is enough flex in budgets to have that for the top team. The amount of uplift would be small beer—it would be 0.1 or 0.2 per cent of the total salary bill. That can probably be handled without having a profit or earn back pool. However, if that approach became generalised so that 15 to 20 per cent of the management in an organisation volunteered for it, such a pool would have to be created.
Thank you, Mr Hutton. I have thoroughly enjoyed the performance so far.
Oh, good. I am glad that it is a gig you are enjoying. [Laughter.]
Do you have any juggling skills? [Laughter.]
I thought that he was going to do that off camera.
I have some questions on the earn back scheme. I am keen that executives of local authorities and other public sector bodies have an incentive to perform better than some of them are performing at present. You said that the earn back scheme will be voluntary. Do you expect public pressure to be the incentive for executives to take part in it?
Once it is up and running and a critical mass of people are involved in it, it will be difficult for the balance to hold out. Most heads of local government are in post for between five and seven years, so there will be an opportunity with natural turnover to introduce it to the contracts of people who are new. With a goodly proportion of current postholders volunteering as well, we will probably get to more than a fifth or perhaps as many as a third being on earn back by year 2. I think that the balance will then quickly volunteer because they will want to demonstrate that they are performance oriented, too.
If the Government goes for it, I do not think that it will take seven or eight years. It can be done in two or three. The dynamic will be set in train.
Are you saying that it will be voluntary for those on existing contracts but compulsory for those who come in, or will it be voluntary for all?
As I see it, which is in line with the legal advice that I got, we cannot require an existing postholder compulsorily to put 10 per cent of their pay at risk as that is not in their existing contract of employment, so we would introduce earn back by asking new appointees to be paid on that basis. Those who choose to volunteer for it can be eligible for it, but we cannot mandate it by unilaterally changing people’s terms and conditions of employment.
You have talked about 10 per cent. Is that the actual figure or just an example?
It has to be a meaningful figure, and I think that 10 per cent is the lowest such figure. Around the world, there are things that are analogous to, but not quite, earn back. The Canadian civil service has something similar. You will see a little box in the final report that discusses the Canadian scheme, which asks for 30 per cent. We can flex earn back and give it more or less bite.
The difficulty with making the figure 30 per cent is that, if the scheme is to be symmetrical, we would open ourselves up to giving people a 30 per cent bonus. Politicians could defend a 5 or 10 per cent bonus, but it becomes tricky for them to defend a 30 per cent bonus unless somebody does something really exceptional. I would encourage people to think in those terms. Also, 30 per cent is a bit of a whack to take out of people’s base pay. The point that your colleague Mr McMahon made then becomes much more pertinent.
You have answered one of my other questions in saying that it would be the same percentage on either side. Someone could go down by 10 per cent or—
Ten or 15 per cent is where I would settle, yes.
Whatever the figure is, it would be the same at either end.
Is the danger not that, as we discussed earlier, the 90 per cent would become 100 per cent, and it would become a double bonus structure after that? People would have a basic that was no longer the basic that they had but was lower than that. They would have a bonus to get to their old basic, and another bonus to get the further 10 per cent.
11:00
Of course there is that danger. In the literature on the economics of salaries and wages, it was Nobel prize winner Daniel Kahneman who first came up with the notion of the reference wage. You as MSPs know what you are paid now and you know what you were paid last year. If you were asked to put some of your base pay at risk for your performance as representatives of Scottish citizens—[Laughter.]—you would know what was at risk because you would have the reference wage in mind. When you are earning back in year 2, your anchor is what you were paid in year 1. There might be some inflation but, in year 5, the postholder’s pay should be referenced back to what it was when the earn back began, adjusted for any increase or reduction in complexity—it may be that the job has become easier. All that is open—it is in the public domain. I understand that the conventional approach to performance pay has that risk, but I do not think that this approach does.
When you described in your report the range of issues that you were grappling with, you used the phrase:
“This is not just a British problem”.
You referred to the Canadian civil service. Are there other international examples, not just on earn back but across the spectrum of issues that you looked at, that you drew inspiration from and would commend to us?
The Canadian pay example was the closest to earn back. I suggest that the committee look at that one. The committee should also look at countries where public sector pay is being held back, such as America. The American public sector is in very bad shape, which is beginning to have a negative impact on the quality of life in America. I recommend to the committee a paper written by a Harvard academic on the hollowing out of the American public sector. I looked at good and bad in North America. It would also be helpful to look at the way in which the Scandinavians approach the issue.
Pound for pound of turnover, the British private sector pays more for its top people than anywhere else in the world, including the United States of America. US CEOs make more money than UK CEOs, but once we adjust for company complexity and turnover, British CEOs make more. In the British private sector, the rate of increase in pay has been even more rapid than in the US—it has gone up eight times in the past 20 years. Lobbyists for business say that it is a global market, to which the response is, “Yes, it is a global market, but we pay the most.” Executives anywhere else in the world are paid less than they would be paid in Britain for a like-for-like job. That has had a shadow effect on the British public sector, which faces the problem that those very highly paid people are the benchmark, which has forced more upward bias and created more urgency in the debate in Britain than in other countries, where the compression between top and bottom is more normal in the private sector and therefore more normal in the public sector.
That explosion has been caused by Britain’s absentee landlord—or absentee shareholder—problem. In fact, the commission on ownership, which I chair, has been discussing how one might close that gap. I will be bringing forward proposals in March or early April so I will come back and answer that question when I have got those sorted out.
In short, the committee should be leery of looking internationally because the circumstances in particular countries with regard to top people’s pay can be very different.
I am grateful for that.
How often did we hear in the debacle over bankers’ bonuses the warning that bankers would flee abroad to wonderful highly paid banking jobs elsewhere? I am sure that exactly the same thing was said in Switzerland and the US.
I am glad that you touched on context earlier and again just now, because it is important. Indeed, the most important sentence in your foreword is:
“only one pound of every hundred pounds earned by the top one per cent of earners is earned by public sector employees”.
Furthermore, as we know, the salaries of the top earners in the private sector went up about 49 per cent last year at a time when the public sector was enduring a pay freeze more or less right across the board.
We have also been talking about a multiple of 20 for top public sector earners. I understand that in Tesco, which you mentioned, the multiple is more like 1,000. Major issues certainly need to be addressed.
Some months ago, Professor Bell raised with us the issue of median earnings in the public sector relative to the private sector and said that in England median earnings in the public sector were about 30 per cent higher than those in the private sector and in Scotland about 40 per cent higher. That is probably what has led to 25 per cent of the public thinking that there are higher wages at the top level of the public sector.
I will finish with a question about reviews of public sector pay, including that of politicians. A review carried out in Scotland recommended that local authority councillors’ remuneration should be increased by 16.9 per cent, but ministers decided not to implement that recommendation. Over the past 30, 40 or 50 years, all the parties represented around the table have, while in office, commissioned public sector pay reviews that recommended an increase in remuneration for, among others, councillors in Scotland and MPs at Westminster. None of those recommendations has been implemented—for political reasons, to be quite blunt—and perhaps we saw some of the fallout in the expenses issue that hit Westminster two or three years ago.
What is your view on such reviews? When people get round the table to put together reviews of public sector pay, should it be decided at the outset that the recommendations will be binding, or should it be the case, as it seems to be now, that if the ruling political party or parties decide that such moves might not suit them politically—there might, for example, be a headline in the Daily Mail—they should simply accept or reject them as they see fit?
That is a good question. I have known David Bell for some years now and admire his work.
It is worth pointing out that one of the reasons why median public sector pay is higher than median private sector pay is because a lot of people in the public sector are quite highly skilled. In other words, there is a skill premium. It is worth disaggregating the numbers carefully because, when you do so, some of the apparently alarming disparities become much less so.
This is a tricky one. We live in a democracy; politicians are under enormous pressure; and one cannot simply passport through pay recommendations without political sanction. Politicians are needed to validate and argue for such increases.
I sometimes say to people across the political spectrum and to anyone who gets involved in public affairs that one has to argue one’s head off—we have to argue, argue, argue. I suppose that the people who do the pay reviews and come up with recommendations such as the 16.9 per cent increase for local councillors need to argue for those recommendations really well. Sometimes the language in pay reviews is technocratic. The assumption is that the numbers will speak for themselves, so the argument is not made. However, if the argument is not made, it is harder for the politician to run with it. If he or she is not provided with really powerful arguments—well, you can write the headlines yourselves. Depending on how robust you are feeling or how much political capital you have, you have to decide whether or not you should run with the argument. That is the political process and I would not want to undermine it. You are all elected and I am not. Hats off to you for getting elected; it is a big deal. Once you are elected, those of us who are not elected must accept the cockpit in which you operate.
I do not want the decisions to be passported through in a mandated way. However, pay reviews are not done with an eye to how the recommendation is going to be argued through once it has been made. In my review of fair pay, I tried to provide a framework for a better discussion of all these debates about pay. It would be much easier to make the case in a world in which we knew about pay multiples and earn back and understood the nature of performance, or if we could disaggregate the numbers so that we could see that there was a skill premium that explained the disparities. If all that was out there, it would be much easier to make the argument. Then I would look to my politicians to be braver and run with the argument that has been made, but I do not want to cut off their ability to make difficult decisions. Politicians have to make decisions.
I do not like the trend in Britain and elsewhere of taking power away from politicians because we do not trust them—they make decisions about so many things, but are helped by independent institutions to depoliticise those decisions. Such decisions are political and we have to recognise that and make the argument for them.
Politicians do not like to be seen to be voting for their own or other politicians’ remuneration. It is about the neutrality of the decision.
That is a well-made point, but we need well-paid councillors. If you pay people peanuts, you get monkeys. It is a big deal to make cuts, and you cannot expect people to do that for nothing.
Absolutely.
On behalf of the committee, I thank you for a fascinating session. It has enlightened us all, as has your report, on which we will reflect.
Thank you all for your questions. It was a good dialogue.
I suspend the meeting until 25 past 11.
11:13
Meeting suspended.
11:25
On resuming—