THE NEW CLOSED SHOP: WHO’STHE CUSTOMER DECIDING IS ALWAYS RIGHT ON PAY? 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.