Executive pay: a taxpayers' issue too

9 Jan 12
John Tizard

If Cameron really means business on the issue of senior business executives' remuneration, he should start by getting the public sector to flex its procurement muscles

Listening to David Cameron expressing his concerns about  executive remuneration in the business sector, I wondered why he did not make the obvious commitment to drive his agenda through the important mechanism of public sector procurement.

When letting contracts for goods and services, government and other public sector bodies could require their suppliers to:

  • publish their remuneration policy as determined not only by their boards but also by the shareholders
  • appoint elected staff representatives to remuneration committees
  • set limits to the ratios between the highest and lowest pay or possibly total remuneration packages; and between the highest and the median
  • publish the total remuneration packages for senior personnel – this would include pay, share options, employer pension contributions and other benefits

The remuneration of senior managers in the public sector is now published, so it is fair and reasonable that the same transparency should apply to their counterparts in the business and third sectors.

Many public bodies have for some time recognised that they can use their procurement power to promote wider social, economic and environmental objectives.   They can require suppliers to meet specified standards in respect of their employment practices including employee terms and conditions, recruitment, the development of talent, staff involvement in decision making and approaches to trade unions.  They can test suppliers' commitment to corporate social responsibility and ethical supply chain management; and specify what is expected.

These factors should then be taken into account when evaluating potential bidders and their proposals.  That said, procurers must be clear about their requirements and ensure that their application does not impede fair competition or create unreasonable barriers to new market entrants, especially smaller firms and social enterprises.   Nor should they deter the incentive for business investment, growth and innovation.

Procurers should be equally clear about how they will test suppliers on these matters through bid evaluation and due diligence. If the conditions are to be included in the contract (which is the best way of holding the supplier to account and getting traction from them), the procuring client should be prepared to monitor behaviour and hold the provider to account. Again, these requirements and their monitoring should be proportionate to the size and nature of the contract, and avoid unnecessary burdens on providers.

In the case of major business groups, the public sector may wish to consider applying such approaches to the controlling company if and when public sector bids and contracts are offloaded to subsidiary businesses. Special consideration would need to be made to internationally based companies.

In adopting a more ethical public procurement strategy which compliments wider public policy goals, the public sector does not have to abandon its key objective of securing best value for the tax payer and service user.  Best value or value for money should never be confused with buying the cheapest whatever the implications for the quality of the product or service, or for staff terms and conditions, or for the impact on the environment.  The key word in 'best value' and 'value for money' is value.  The public sector is right to demand that its suppliers meet publicly acceptable and defined values themselves.   Public money is being used and the public has a right to expect it to be spent for public benefit.

Progressive businesses will not be afraid of or opposed to such approaches provided that the conditions and requirements set are applied fairly to all, and are not burdensome. It would be best for them to be agreed within some nationally agreed framework which takes account of national and international markets, comparable pay and conditions in private sector orientated businesses and does not benchmark the expected senior remuneration for business sector suppliers directly with the public sector without taking into account factors such as different risks and incentive arrangements between the sectors. This requires dialogue and hopefully consensus but government ultimately has the market and legislative powers to drive the matter forward.

It is not fashionable to argue for a social partnership approach to industrial or other business matters currently but there would be much merit in government convening discussions with business, social enterprise, trade union, consumer and voluntary and community sector organisations to explore how remuneration and wider employment and ethical issues could be best addressed through public procurement. Ideally, there would be protocols to agree what would be considered reasonable approaches to remuneration policy and practice as well as how such policies could be most effectively and efficiently implemented. Such protocols could also ensure some equity across public sector markets and protect the conditions for investment, risk taking and innovation.

If the government is really resolute in addressing remuneration for senior executives in the business sector, it should start where it spends much of taxpayers’ money – and flex the muscle of public procurement.

John Tizard is an independent strategic advisor to the public, third and business sectors



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