THE NEW CLOSED SHOP: WHO’STHE CUSTOMER DECIDING ONIS ALWAYS PAY? RIGHT HOW TO REDUCE EXECUTIVE REWARDS THEWITH MAKE PROCUREMENT UP OF REMUNERA CONTRACTSTION COMMITTEES High Pay Centre About the High Pay Centre
The High Pay Centre is an The High Pay Centre was formed independent non-party think tank following the findings of the High established to monitor pay at the Pay Commission. The High Pay top of the income distribution and Commission was an independent set out a road map towards better inquiry into high pay and boardroom business and economic success. pay across the public and private sectors in the UK, launched in 2009. We aim to produce high quality research and develop a greater understanding of top rewards, company accountability and For more information about our work business performance. We will go to highpaycentre.org communicate evidence for change to policymakers, companies and Follow us on Twitter @HighPayCentre other interested parties to build a consensus for business renewal. Like us on Facebook
The High Pay Centre is resolutely independent and strictly non- partisan. It is increasingly clear that there has been a policy and market failure in relation to pay at the top of companies and the structures of business over a period of years under all governments. It is now essential to persuade all parties that there is a better way.
2 Public spending, private profit and Contents executive rewards
4 Executive Summary
6 Introduction
9 How big is the outsourcing sector?
11 A short history of social clauses in procurement
12 Public support for social requirements
14 Private Providers of public services
16 Conclusion
3 High Pay Centre Executive Summary
Outsourcing firms account for purse for such a large share of roughly 24% or £84 billion of public their revenue, it might well be sector spending – nearly £3,000 per argued that their executives have adult each year. Some estimates more in common with public sector suggest this will increase to £140 managers (for whom the circa billion by 2015. The outsourcing £140,000 pay of the Prime Minister sector employs 1.2 million people or is frequently cited as a benchmark) 4% of the workforce. rather than the private sector, where the average pay for a FTSE 100 With the government such a big Director stood at £4.3 million in customer of private sector firms, 2012. we believe it should exercise its consumer power to influence pay To bring executive rewards in policy at those companies. outsourced companies back in line with the public sector, and to According to a report by the ensure and encourage fairer pay National Audit Office, the four practices, this report recommends largest private sector providers that the Government use its power of services to the public sector as purchaser to include fairer are Capita, Serco, Atos and G4S. pay policies in any private sector Between them, the companies provider contracts. These policies receive around £4 billion in public could include, but are not limited to: money. Their CEOs were paid around £2-2.5 million each. >>Publication of a pay ratio, including the ratio of top pay to All these companies make at least bottom pay. one third of their UK income from the public purse. For Serco and >>A pay cap for any company Atos, the figure is at least 50%. receiving public contracts over a certain value, either in absolute Given that the companies covered terms or as a proportion of their by our research rely on the public revenue. This could be applied
table 1 1
Percentage of UK Public UK UK revenue CEO Company Sector Revenue/£bn from public Pay/£m Revenue/£bn purse 1 Figures taken from National Audit Office, Serco 2.7 1.8 67 2.5 The role of major contractors Atos 1.4 0.7 50 2.3 in the delivery of public services, p5. CEO pay G4S 1.9 0.7 37 2.3 widely reported in the Capita 3.2 1.1 34 1.9 media 4 Public spending, private profit and executive rewards
on the same principle that the US Government caps pay at federal companies.
>>Imposition of a maximum pay ratio in any private sector company providing public services. This could initially be set at a rate of 90:1 but be decreased over a period of 10 years.
>>Worker and consumer representatives to be included on the company board of directors.
By using their purchasing power to opt for goods and services that also deliver good social outcomes, Governments can make a major contribution to encourage ethical business, and fairer pay practices.
5 High Pay Centre Introduction
While wages for ordinary workers This report looks at another way have stagnated since 2008, the in which government could exert trend towards ever-increasing positive downward pressure on executive pay packages for executive rewards, through its business leaders was unaffected by power as a purchaser. the financial crisis. In 2012, the last full year for which data is available, The rise of outsourcing FTSE 100 Chief Executives enjoyed a 14% pay rise, even as pay rates Since the late 1970s we have seen across the economy failed to keep successive Conservative, Labour up with inflation.2 and Coalition governments move towards a new model of public This growth in executive pay is not service provision, one intended the result of exceptional company to maximise efficiency through performance; indeed there is scant targeted use of the private sector. evidence of any correlation between Services have been increasingly executive rewards and company outsourced and purchased by the performance. Rather it is the result government through procurement of factors including: processes, rather than managed and delivered by public servants >>executive capture; employed directly by the Government. >>rent seeking; The rhetoric coming from >>failure on the part of government Government to explain this shift in to take meaningful action; provision has not always been clear. Enhanced business efficiency; the >>And the wider narrative of private sector’s capacity to deliver ‘wealth creation’ that attributes far investment; and growth in share greater responsibility for economic ownership have all, at times, been prosperity to a tiny pool of ‘top cited as advantages of private talent’ than is their due. sector provision of public services.
The 2013 Business Enterprise and Despite these different objectives, 2 Financial Times, Top Directors pay rises Regulatory Reform Act empowered the increasing use of outsourcing as 14% over the last shareholders with the right to a a means of public service delivery year, 17 November 2013 via http:// binding vote over companies’ has made the government one of www.ft.com/cms/s/0/ executive pay policy. However, the the biggest purchasers of private e884ac6a-4dee-11e3- b15d-00144feabdc0. average shareholder advisory vote services. html#axzz2tlSUxOyf against FTSE 100 remuneration 3 Julius, D., Public reports remained below 6% for each How big is the outsourcing Services Industry Review, 2008, Retrieved year between 2006 and 2011. So it sector? 15 July 2013: http:// is doubtful whether a binding vote www.bis.gov.uk/files/ file46965.pdf. Note that will help to curtail excessive and Today, roughly £1 in every £3 that this estimate includes unwarranted pay awards. government spends on public services procured by government to support services goes to independent service delivery. providers.3 Oxford Economics 6 Public spending, private profit and executive rewards
estimates the current outsourced currently nearly £3,000 per person is market for public services has being spent on the private provision an annual turnover of £82 billion, of public services every year. Given representing around 24% of the total this level of investment it seems only spend on goods and services by right that people have a say in how the public sector.4 their money is spent.
It is widely understood that the market is only set to increase, Seymour Pierce, the City broker, Box 1: What is private estimates that the size of the public provision? sector outsourcing market for support services could increase Private provision of public from its current level of £80billion service can be divided into 3 to £140billion as a result of the new basic forms: spending regime by 2015. Privatisation, where a In addition the public services >> goods or service is wholesale industry directly employs 1.2 million moved into the private sector. people, around 4% of the total This can be seen in the work force.6,7 privatisation of the utilities companies in the 1980s The scale of public sector and 1990s. outsourcing in the UK is relatively unusual, by international standards. Outsourcing, where the While outsourced public service >> government commissions the provision is dominant in the US, private sector to provide a 4 The Size of the UK most public services are still service, or part of a service. Outsourcing Market provided by the public sector in Across the Private and Public Sector, Oxford other countries. Public private Economics, >> April 2011 partnerships, where the 5 According to one analysis by http://www. government works with the theguardian.com/ Information Services Group (ISG) business/2010/may/24/ private sector, for example the UK is second only to the US in public-spending-cuts- Private Finance Initiative (PFI) hit-suppliers terms of the size of its outsourcing 6 used to build hospitals. http://www.cbi.org. market. The UK alone accounts uk/business-issues/ public-services/public- for 84% of total public sector services-and-business/ outsourcing in Europe, the Middle With the UK government now the-role-ofbusiness/ 7 8 http://www.ons.gov. East and Africa (EMEA). spending over £80 billion on uk/ons/rel/lms/labour- private provision of public goods, market-statistics/ In the fiscal year 2008–09 the it certainly begs the questions: june-2013/sty-uk- employment.html UK government’s total spending isn’t it right that it use its power as 8 http://www. amounted to £618.6 billion, or a consumer to encourage positive computerweekly.com/ news/2240179844/ 43.2% of the UK’s national income. change in the companies it is UK-public-sector- This translates into just over £10,100 buying services from? Over the last outsourcing-world- phenomenon for every person in the UK, or about 30 years we have seen a growth 9 IFS (2009) Public £13,000 per adult.9 This means that in the private provision of public Spending 7 High Pay Centre
services. Over the same period, we have seen a dramatic increase in ‘performance related pay’, bonuses, and overall pay packages for executives in the private sector.
Those individuals running our companies, and increasingly our hospitals, prisons and care homes are predominantly ‘incentivised’ through a variety of performance- based awards. These awards have questionable efficacy when it comes to encouraging long- term performance, but are highly effective at obfuscating inflated pay packets.10
This report looks at these private providers of public services, their pay levels and their profits and asks could procurement requirements reduce executive reward packages? This report in particular focuses on the role that pay clauses could have in public procurement contracts.
10 High Pay Commission (2012) Cheques with Balances 8 Public spending, private profit and A short history of social clauses executive rewards in procurement
The economic significance of public Indeed according to Article 26 procurement to companies gives of the EU Directive (2004/18/EC) local and national government a ‘contracting authorities may lay market power, which can be used down special conditions relating not only for economic but also for to the performance of a contract. wider social purposes.11 The conditions governing the performance of a contract may, Indeed there is a history of pay in particular, concern social and clauses in public procurement environmental considerations.’ The dating from the 19th century. In inclusion of social considerations 1949 the International Labour leaves the door open for clauses on Organisation (ILO) adopted a executive pay. specific Convention on “Labour Clauses in Public Contracts” It has also been confirmed by the (Convention No. 94). The purpose European Court of Justice in a case was to ensure that workers hired by against the Netherlands (C -368/10) 11 Schulten ( ) companies that were contracted in ‘that contracting authorities are also Pay and other social clauses in european would not receive less favourable authorised to choose the award public procurement conditions than those in appropriate criteria based on considerations of a 12 ibid collective agreements or other forms social nature.’ 13 European Commis- sion (2012) Buying 12 of pay regulation. Social : A Guide to In North America, the US even taking account of social considerations in public According to the European offers a limited international procurement Commission a socially responsible precedent for social clauses in 14 European Commission (2010) procurement policy is about ‘setting public sector contracts relating Buying Social : A Guide an example and influencing the specifically to executive pay. to taking account of market’ in order to ‘give companies Contracted organisations can social considerations in public procurement real incentives to develop socially only bill the Federal Government 15 European responsible management.’13 for staff time equivalent to the Commission Evaluation 16 Report (2011) Impact President’s $400,000 salary. and Effectiveness of In addition it is seen as an important EU Public Procurement Legislation instrument to “foster the European In the UK, the Coalition 16 Government social model as a “vision of society Government’s own rhetoric on Executive, Obama to that combines sustainable economic ‘localism’ has emphasised the Seek Much Lower Cap on Contractor Exec Pay, growth with improved living and importance of devolving power 30 May 2013 via http:// working conditions.”14 not just to subsidiary levels www.govexec.com/ contracting/2013/05/ of government, but to directly obama-seek-much- As the European Commission involve local people in the design lower-cap-contractor- exec-pay/64007/ has noted in its recent evaluation and delivery of public services. 17 Eric Pickles, report there has even been Introducing the 2011 Localism Act, The Localism Bill ‘growing policy interest in re- Secretary of State for Communities reverses a century of centralisation, orienting public expenditure and Local Government Eric Pickles 18 November 2011 towards solutions that are more stated his intention to allow people via http://www. conservativehome.com/ compatible with environmental ‘to vote against excessive council localgovernment/2011 sustainability, promote social tax rises, elect a mayor for their /11/in-pursuit-of- localism-restoring-a- policy considerations, or city, save a community treasure or 100-year- democratic- support innovation.’15 take over running a local service.’17 deficit.html 9 High Pay Centre
The 2012 Social Value Act enables argue that service-users and contracting public authorities to taxpayers ought to play a more take wider social and environmental central role in shaping the way in considerations into account which public services are designed when awarding contracts for and delivered.18 public services. The concepts of localism, social More generally, models of ‘co- value and co-production are all production’ and ‘service user philosophically consistent with the engagement’ in public service idea of pay-related clauses in public provision have become increasingly sector contracts when supported by popular with policy experts, who public consensus.
figure 1 Use of social requirements in tender documents by European contracting authorities
As much as Never possible 26%
51% Regularly 14%
9%
18 See, for example, Sometimes Guardian, International focus: public service co-production around the world, 13 November 2012 via http://www. theguardian.com/ local-government- network/2012/nov/13/ coproduction-public- services ; or Institute for Government, Engaging Citizens in Policy Design – The Practicalities, July 21 2011 via http://www. instituteforgovernment. org.uk/events/ engaging-citizens- policy-design- practicalities 10 Public spending, private profit and Public support for social requirements executive rewards
According to a survey of supports the consideration of social Eurobarometer only 13% of people aspects in public procurement in Europe think that that the contracts. This varies across the EU, cheapest price should be the most but the UK has 88 % support rate important factor for awarding public (see figure 2).19 contracts. 88% of the EU population
figure 2 Support for the consideration of social aspects in public procurement even if it makes public contracts more expensive (2011) in %
100
95
90
85
80
75
70 CY AT DE LU ES FI SI BE SK NL HU FR EE CZ MT EL IT UK SE EU LT IE DK LV BG PL RO PT
19 Eurobarometer statistics published on http://ec.europa. eu/public_opinion/ index_en.htm 11 High Pay Centre Private Providers of public services
In the 1980s, as some publicly- Between them, the companies owned services were fully receive around £4 billion in public privatised, some provision was money. Their CEOs were paid simply contracted out. The “internal around £ 2-2.5 million each. market” in the health service, whereby the NHS contracted certain All these companies make at least services from private healthcare one third of their UK income from providers, was the first, but since the public purse. For Serco and then we have seen security, Atos, the figure is at least 50%. welfare and care provision have all At smaller outsourcing firms, the moved towards a model based on figures are even more striking. outsourcing. A report from the CBI CareUK, which provides care demonstrates that 48% of hospital services to the elderly and disabled, security spending is outsourced, receives 91% of their revenue compared to 47% of local from the public sector.22 Their government waste management operating profit of 31% suggests services, 27% of schools catering, that somewhere in the region of and 16% of police forensics.20 This £150million is made in profit each is an ever growing industry funded year by CareUK from providing by the public purse. services to the public sector. While the government will not release This section of the report looks at details on expected profit margins a number of key providers and for companies contracted to provide analyses their recent performance services in the public sector, these and pay levels. figures suggest that the margins can be very high. According to a report by the National Audit Office, the four What’s more while the public sector largest private sector providers of is experiencing pay restraint and services to the public sector are senior public sector managers are Capita, Serco, Atos and G4S. subject to intense criticism over the size of their pay packages,
table 1 21
Percentage of UK Public 20 UK UK revenue CEO Confederation of Company Sector British Industries (CBI) Revenue/£bn from public Pay/£m 21 Figures taken from Revenue/£bn National Audit Office, purse The role of major contractors Serco 2.7 1.8 67 2.5 in the delivery of public services, p5. CEO pay Atos 1.4 0.7 50 2.3 widely reported in the G4S 1.9 0.7 37 2.3 media 22 Based on annual Capita 3.2 1.1 34 1.9 report 2011 12 Public spending, private profit and executive rewards
executive pay in private providers whom the circa £140,000 pay of the remains high, with rewards of £1m Prime Minister is frequently cited as or over remaining the norm. The a benchmark) rather than the private CEO of Serco received total pay sector, where the average pay for of £2.5m while the boss of Capita a FTSE 100 Director stood at £4.3 took home £1.9m. While these million in 2012. rewards may be standard for a private company, when compared Though the government has stated to pay levels in the public sector, that it wants to reduce executive they are stratospheric. Given that pay, executive rewards remain the companies covered by our more than a hundred times the pay research rely on the public purse for of ordinary workers in companies such a large share of their revenue, that depend on the Government it might well be argued that their for a significant proportion of executives have more in common their revenue. with public sector managers (for
Box 2: Recent Outsourcing Scandals
As the scale of outsourcing has increased, so have the number of outsourcing scandals. It is arguable that as outsourcing moves into areas where performance is less easily measured, because of the human element, the likelihood of problems developing in the contracts will only increase. Indeed a report by the Institute for Government (IfG), concluded that the Government still did not have the skills to manage 23 http://www.bbc.co.uk/ private sector contracts effectively. Here are just some examples of news/uk-25001800 scandals to hit outsourcing firms in the UK: 24 http://www. bbc.co.uk/news/ business-24672344 >>Audit of G4S suggested the firm had been charging to tag criminals 25 http://www.bbc.co.uk/ who were either dead or in jail.23 news/uk-17476415 26 http://www. >>Serco is being investigated by the Serious Fraud Office (SFO) after theguardian.com/ claims it had overcharged the government by “tens of millions” of society/2013/jul/11/ 24 serco-gp-out-of- pounds for electronic tags for criminals. hours- substandard? >>Leaked documents show welfare-to-work firmA4e knew of guni=Article:in% widespread potential fraud and systemic failures by management to 20body%20link 27 http://www.telegraph. 25 control it. co.uk/finance/newsby >Serco accused in House of Commons report of falsifying data on a sector/retailand > consumer /9873300/ contract for out-of-hours GP services, the report stated that national Compass-and- standards had not been met, there was a culture of “lying and cheating”, Whitbread-caught-up- 26 in-horse-meat-scandal. and the service offered to the public was simply “not good enough”. html >>Compass, the major provider of outsourced food in public services 28 http://www. admitted that its own tests had shown that some of its products independent.co.uk/ news/uk/home-news/ 27 contained “a minor amount of horse DNA”. britains-cruellest-care- >Neglect stemming from “institutionalised abuse” at a care home home-institutional- > abuse-contributed- directly contributed to the deaths of five of its elderly residents at to-deaths-of-five- Southern Cross, which was Britain’s largest care provider.28 pensioners-8889770. html 13 High Pay Centre Policy Proposals
As outsourcing increases this >>Publication of a pay ratio, opaque area of government including the ratio of top pay to spending and public service bottom pay. provision expands. This report has demonstrated how executive >>A pay cap for any company pay in these companies outstrips receiving public contracts over a public sector pay, despite the fact certain value, either in absolute that pay in both the public and terms or as a proportion of their outsourcing sector is funded, at revenue. This could be applied least in part, from public money. on the same principle that the US It has also highlighted how these Government caps pay at federal companies can often become companies. mired in scandals, for poor quality service, which has created an >>Imposition of a maximum pay intense debate about the true value ratio in any private sector company of outsourcing. providing public services. This could initially be set at a rate of 90:1 When the executives, who are but be decreased over a period of ultimately responsible for these 10 years. scandals, receive multi-million pound pay packages, the public >>Worker and consumer are understandably angry. This representatives to be included on adds an unhelpful element to the the company board of directors. debate about outsourcing, and could weaken faith in Government These policies would ensure fairer and business, with damaging wider pay policies within companies, they consequences. The fact that a small would encourage company bosses tier of senior managers benefit to increase pay at the bottom, and so significantly from outsourced would ensure that workers and provision of public services creates consumers had a say in the running the impression that advocates of of the company. an outsourcing model are acting in their own interests, rather than the The government has shied away public interest. from imposing a pay cap or worker representation across the private To bring executive rewards in sector as a whole, on the basis outsourced companies back in that it is the role of shareholders line with the public sector, and to and customers to pass judgement 29 Oxford Economics, The Size of the UK ensure and encourage fairer pay on company stewardship. In the Outsourcing Market practices this report recommends case of outsourcing firms, however, Across the Private the Government is the customer. and Public Sector, that the Government use its power Oxford Economics, as purchaser to include fairer It has the leverage of around £80 2011 via http:// pay policies in any private sector billion worth of spending on private www.bsa-org.com/ 29 uploads/publication/ provider contracts. These policies sector outsourcing. In this context, file/98/BSA_OE_UK_ could include, but are not limited to: regulations to contain the multi- outsourcing_across_ the_private_and_public_ million pound pay packages of sectors_Nov2012.pdf outsourcing executives represent 14 Public spending, private profit and executive rewards
not intrusive state regulation, but democratic consumer activism designed to ensure that public money is spent in a manner that is coherent with public values and the public interest.
15 High Pay Centre Conclusion
£80 billion in public spending is business, and fairer pay practices. going to the private sector every Beyond this it is also right to ask, if year. This is only set to increase, the government has such influential yet outsourcing remains a relatively buying power, why can it not opaque area of public spending. use this influence for social and environmental aims? Put simply, the What’s more, the increasing government is a major customer, outsourcing of public services and isn’t the customer always right? has seen practices prevalent in the private sector trickle into the public sector, particularly ever escalating pay for top executives and huge gaps between the lowest and the highest paid. This creates the impression that the fashion for outsourcing results from the fact that it serves the interests of the rich and the powerful rather than the public as a whole.
As this report has shown, the top companies saw their executives receive enormous executive rewards this certainly begs the question, what are we paying for?
When nearly 50% and in some cases more of their income comes from the public purse, it is not clear why the lead executives of outsourcing firms enjoy packages in excess of ten or twenty times what might be considered reasonable for a leading civil servant. Performance-related pay is meant to encourage entrepreneurial activity and innovation, but when it comes to private provision of public goods the role is not so much entrepreneurial rather that of a competent public servant.
By using their purchasing power to opt for goods and services that also deliver good social outcomes, Governments can make a major contribution to encourage ethical 16 Public spending, private profit and Annex 1: executive rewards Outsourced companies30
Construction and “hard” Key Service Sectors facilities management Serco, Morrison, ISS, Rentokil Initial, Primary healthcare Carillion, MITIE, Interserve, Mitie, Care UK, UnitedHealth, Humana, Balfour Beatty, Integral, Laing, Atos Origin, Kaiser Permanente, Amey, Caxton, Operon, GSL, Wates, Laing (through ExcellCare), GSL, Amec, Bovis, Costain, Skanska. Babcock & Brown, and Carillion.
Support services and “soft” Housing facilities management Home Group, North British, Compass, Mitie, Spectrum, ISS, Wakefield, Anchor, Sanctuary, Rentokil Initial, Aramark. London & Quadrant, AmicusHorizon, Genesis, Places for People, Circle ICT, business process and Anglia, Synergy, Riverside. corporate services Capita, BT, Serco, SBS, HBS, Custodial services Vertex, Atos Origin, Liberata, IBM, GSL, Serco, Sodexho, GEO, Fujitsu, EDS, Xansa (part of Steria). Reliance, UKDS.
Long term care Tertiary education Southern Cross, Four Seasons, INTO (part of Espalier), Kaplan, IBT, BUPA, Craegmoor,Barchester, INSEARCH, A4E, Capita, Centre CareUK. for British Teachers (a charity), VT (part of Vosper Thorneycroft), BPP, Schools Cambridge Education. Amey, Costain, Skanska, Bovis, Capita, Mott Macdonald, Balfour Secondary healthcare Beatty. Alliance Medical, Capio, Tribal/ Mercury, Nations, Netcare, Care UK. Waste management LEA outsourcing Serco, Capita, Tribal, Veolia, Biffa, SITA, Shanks, FCC Amey, Nord Anglia, Cambridge. (Waste Recycling Group), Cory, Leisure services DC Leisure Enterprise, May Gurney and Management, Esporta, Greenwich Greenstar. Leisure.
Consultancy IBM, LogicaCMG, Accenture, PA, Capgemini, Mott MacDonald, PricewaterhouseCoopers (PwC), Atos Origin, KPMG, Deloitte, Xansa (Steria), Tribal, McKinsey, Booz Allen Hamilton, Hedra, Grant Thornton, Ernst and Young.
30 SEUK (2012) The Shadow State: a report about outsourcing of public services 17 Design | Rachel Gannon