Official Report (Hansard)

Session: 2008/2009

Date: 10 December 2008

COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Criteria for Awarding Bonuses to Senior Civil Servants

3 December 2008

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson) 
Mr Roy Beggs 
Dr Stephen Farry 
Mr Fra McCann 
Ms Jennifer McCann 
Mr Adrian McQuillan 
Mr Declan O’Loan 
Mr Ian Paisley Jnr 
Ms Dawn Purvis 
Mr Peter Weir

Witnesses:

Mr Derek Baker ) Department of Finance and Personnel 
Mr John McKernan )

The Chairperson (Mr McLaughlin):

I welcome Derek Baker, director of personnel for the Northern Ireland Civil Service, and John McKernan, head of the pay and grading unit. I remind members and witnesses that Hansard is recording the session. Therefore, please turn mobile telephones off completely, because they interfere with the recording equipment.

I suggest, Mr Baker and Mr McKernan, that, unless you have a pressing need to address the Committee, we move straight into discussion and questions. If you want to develop a particular point, feel free to do so.

Dr Farry:

Good morning, gentlemen. It is good to see you here.

Northern Ireland , through the Senior Salaries Review Body (SSRB), tends to have similar arrangements for the payment of senior civil servants to those in Great Britain. The SSRB is a topical subject and was mentioned on the news this morning. In his latest review, Varney II, Sir David Varney concluded that the public sector in Northern Ireland pays an average of 19% more than the private sector. In particular, he highlighted the highly significant wage differential between senior levels of civil servants and their counterparts in the private sector. There is a problem with the public sector crowding out the private sector on pay.

In Great Britain, one could argue that, in a very competitive situation, talented people are needed at the top of the Civil Service and, therefore, competitive salaries must be offered to attract high-calibre people who may otherwise take up attractive jobs in industry. The situation in Northern Ireland is, perhaps, different in that the private sector provides more attractive pay settlements than the public sector, which tends to trail behind. Therefore, the crowding out situation in Northern Ireland is contrary to the situation in Great Britain. In that context, how appropriate is it to mirror practices in Great Britain?

Mr Derek Baker (Department of Finance and Personnel):

There are several points for me to address, and perhaps I should begin by rewinding slightly. The rationale for associating Senior Civil Service salaries with the recommendations of the Senior Salaries Review Body stems from decisions taken in 2001. It was decided at that time that the Senior Civil Service should be treated as a corporate cadre, and that the nature of the jobs and the kind of leadership and competences required were largely similar. It was further decided to promote and underpin the Senior Civil Service with a common grading and salary structure, a common competence framework, and so forth. The SSRB provides a frame of reference for determining salaries.

With regard to the local labour market, I do not have the Varney II Review in front of me, but I am not altogether sure that it stated that Senior Civil Service salaries are higher than their comparators in the private sector. That may be the case for more junior grades in the Civil Service, but I do not think that he made that point specifically in relation to Senior Civil Service salaries.

In Northern Ireland, comparisons could be made with the wider public sector, not only with the Civil Service. Recently, the recruitment of people to the Senior Civil Service at the minimum of the relevant pay band has proved difficult in several instances, because people in other sectors earn more. Therefore, job offers have been turned down or we have had to negotiate with people who want to come in on higher salaries because they are already earning more — and bear in mind that most Senior Civil Service posts are recruited via external competition and not within the Civil Service.

Dr Farry:

I appreciate your point about attracting high-calibre people to the most senior posts in the public sector. However, my impression of pay, and I stand to be corrected, runs contrary to what you said. My impression is that, at the senior level, that differential is much more acute across the board. Some people in the private sector may earn significantly more but, as a general rule of thumb, the differential between the public and private sectors seems to be much more accentuated the higher up in the NICS one goes.

If anything, there is an issue about lower-paid workers in the public sector. There is not much, if any, of a differential between their pay and that of their private-sector counterparts. I assume that, in light of what you said, there are no plans to address that issue in the context of Varney II.

Mr Baker:

There are no plans at present to disengage from the Northern Ireland Senior Civil Service taking its cue from the Senior Salaries Review Body. That is, of course, possible to do, and there is no reason why that should be immutable, but there are no plans to do so. Ultimately, that would be subject to a decision by Ministers.

Dr Farry:

Do you accept that there is a different context for the pay of senior civil servants in Northern Ireland than would pertain for the pay of Whitehall’s senior civil servants in the south-east of England?

Mr Baker:

Yes, and it is for precisely that reason that Civil Service salaries in the south-east of England have a London weighting, which is a premium on top of the basic salary in order to take account of that.

Dr Farry:

Does that premium rise with promotion, or does it tend to tail off?

Mr Baker:

I do not know. I do know that if you compared the median or average Senior Civil Service salaries in the Northern Ireland Civil Service with those in Whitehall, the average salary in Whitehall would be significantly higher because although Whitehall also recruits from outside, it is having to bring in people on much higher salaries, which is creating some difficulties.

Mr O’Loan:

It will come as no surprise to you that there is significant disquiet in the political community and among the public about the bonus scheme for senior civil servants, not least because of the difficult and straitened economic times in which we are now living. The Senior Salaries Review Body expressed serious concerns about the scheme, because of evidence that it is divisive and demotivating. The trade unions described the scheme as, I believe, no longer fit for purpose. Despite those criticisms, the SSRB is working to increase the pot by up to 10%. Has the old-fashioned, traditional concept of public service disappeared; and, more generally, what were the original objectives of the bonus scheme for senior civil servants, and what assessment have you made of the effectiveness of the scheme?

Mr Baker:

Although it is a broad question, I do not believe that the old-fashioned, traditional values of public service have disappeared. In the Civil Service specifically, and in the wider public service generally, there is huge commitment among public servants to public service. Regardless of the pay strategy that is in place, you will find a commitment to public service. Nothing has changed since the SSRB and the Cabinet Office introduced the concept of bonus payments as part of Senior Civil Service pay back, I believe, in 2001. There has been no diminution of the concept of public service.

With regard to the rationale for bonus payments, I mentioned, in response to the first question that I was asked, the concept of a corporate cadre of senior civil servants. At that time, the Government felt that a culture of continuous improvement was required in the performance of the Civil Service, which is a sentiment with which, I think, we would all agree. A decision was taken that one way to promote that culture would be through greater differentiation in pay, so that the top performers would be rewarded much more and receive a better pay package than others.

Since then, there has been progressive differentiation in pay, which applies to the base pay award — the consolidated element of the pay award — and to bonus payments. Over several years, the Senior Salaries Review Body has been recommending, year after year, that a greater proportion of pay is made up of non-consolidated bonus payments, which the Cabinet Office has accepted, year after year. The rationale, whether or not you accept it — and that is a judgement call — is that higher levels of bonus payments being available to the top grouping of civil servants will encourage stronger performance and result in more civil servants stretching themselves to get into that top grouping, rather than find themselves in the grouping that receives no bonus. The rationale is to encourage better performance through greater differentiation in pay.

Trade unions do not like the concept of bonuses. I should qualify that remark: there is no pay bargaining or negotiation with the trade unions on Senior Civil Service pay. The SSRB recommends a pay award, and the Government accepts, rejects or modifies that proposal. Thereafter, the pay award is applied. However, there is no engagement or negotiation with staff representatives or trade unions. The main Civil Service trade union with which we deal in Northern Ireland, NIPSA, does not at all favour the concept of bonus payments. It feels that bonus schemes are divisive, and would much prefer that any pay should be in the form of consolidated, which builds year on year and counts towards future pension payments.

The final question is the most difficult to answer: the impact of bonus pay and how it is perceived. Individuals who receive a top or good bonus regard the system highly. However, individuals who find themselves in the bottom category and do not receive a bonus will, potentially, be demotivated and disappointed. That will, probably, encourage them to try harder in the following year in order to avoid finding themselves in that category. However, difficult judgement calls must be made by those people who make the ultimate decisions to award — or not award — a bonus. All pay systems have pros and cons, and different judgements must be made. I would not like to offer a definitive opinion on whether the bonus system is good, bad or indifferent, because I do not want to second-guess SSRB judgements.

Mr O’Loan:

The definition of bonus level 1 mentions:

“the most difficult, political, operational and economic environment”

and:

“displaying exceptional leadership”

therein. Do senior civil servants operate in an environment that could be described as:

“the most difficult, political, operational and economic environment”?

Mr Baker:

The permanent secretary in each Department makes an individual judgement on whether an employee falls into the top bonus category. The permanent secretary is, ultimately, the final arbiter of that decision, and he or she must decide whether an individual’s job, or the circumstances in which they operate, are particularly difficult. There are many reasons why a job might be particularly difficult, but each case is judged individually.

The Chairperson:

Who decides on the award of bonuses?

Mr Baker:

The process begins in individual Departments with a pay committee that is chaired by the permanent secretary and involving senior staff. In light of performance appraisals and the bonus criteria, the committee collectively considers the relative performance. It is a relative process rather than an absolute one. Individuals are measured against one another to obtain a ranking. The committee discusses the relative performance of senior civil servants but does not make a final decision, because, obviously, some members of the pay committee are senior civil servants who will also have to receive a pay award. Each Department has to allocate its senior civil servants to a quota for base-pay purposes and for bonus purposes. The permanent secretary considers the pay committee’s deliberations and, ultimately, on his or her own, decides on the final allocations.

The Chairperson:

Senior civil servants are, therefore, involved in the process up to a particular level, and the permanent secretary makes the final decision. Is that correct?

Mr Baker:

The permanent secretary makes the final recommendations for his or her Department. Then, at a higher level, the permanent secretaries will meet collectively and sort of reconstitute themselves as the Senior Civil Service pay committee for the purposes of that meeting in order to ensure moderation across all Departments, and to ensure that the final outcome is in line with the agreed pay strategy, as recommended by the SSRB and approved by the Minister, so that there are no breaches and that everyone is adhering to the various quotas.

If any moderation is needed across Departments — for example, if one Department has a particularly difficult issue and wants to go above the quota, or another Department wants to go below it — that is carried out by the Senior Civil Service pay committee, which is, effectively, the group of permanent secretaries.

The Chairperson:

Do permanent secretaries have a bonus system?

Mr Baker:

Permanent secretaries have a pay strategy, and a separate arrangement is in place to determine their pay. Do you wish me to explain that?

The Chairperson:

For the benefit of the Committee, I am attempting to understand the structure, so will you explain the salient point of who decides whether the permanent secretaries have earned their bonuses?

Mr Baker:

The permanent secretary remuneration committee, which is separate from the permanent secretary committee, includes two independent members who are not civil servants: the committee chairperson, Mr J B McGuckian, who is from the private sector and a former chairperson of the Industrial Development Board, and Mrs Ann Shaw. The other members are Mr Jonathan Phillips, permanent secretary of the Northern Ireland Office, and Mr Nigel Hamilton, head of the Northern Ireland Civil Service.

Having discussed permanent secretary performance with Ministers and having completed his own assessment, the head of the Northern Ireland Civil Service presents recommendations for permanent secretary pay to the permanent secretary remuneration committee, which then reaches a decision.

Mr Paisley Jnr:

Do you accept that that is a subjective test?

Mr Baker:

I do; any performance appraisal is, by definition, a subjective assessment.

Mr Paisley Jnr:

Your definition of achieving objectives despite the most difficult political circumstances compared to some political difficulties, or of displaying a high level of leadership compared to just leadership, may be different from mine, and such judgements are very subject with regard to measurement.

Mr Baker:

I fully accept that point. Such judgements are very difficult, and they will always be subjective on a performance appraisal.

Mr Paisley Jnr:

Circumstances could arise in which the public perceive the delivery of an organisation’s services to be a complete shambles, yet strong leadership is demonstrated.

Mr Baker:

Yes, but that applies to all those factors. For instance, I am quite sure that if an individual had presided over a public-service-delivery shambles that that would be factored into the permanent secretary’s deliberations.

Mr Weir:

Under such circumstances, an individual might say that his or her political masters had been at fault; although there had been a complete public shambles, the civil servant delivered a high level of leadership.

Mr Baker:

The process is difficult.

Mr Paisley Jnr:

It is, absolutely.

Mr McNarry:

Fifty people received a bonus of £10,000, 50 received £6,500, 50 got £4,000 and 50 people got nothing. Are the final 50 the demotivated people about which you spoke?

Mr Baker:

They could be.

Mr McNarry:

Are they?

Mr Baker:

I do not know.

Mr McNarry:

How was the decision reached to pay each bonus level to 50 people, which is a nice round number? It is 200 divided by four. Did that happen by coincidence?

The Chairperson:

I think that 49 people received the top level of bonus.

Mr Baker:

It is not just coincidental — well, perhaps it is a happy coincidence. Seriously, however: when the Senior Salaries Review Body and the Cabinet Office develop the pay framework they also recommend the percentage of civil servants that should receive a bonus. In the year in question, they recommended that approximately 75% of civil servants receive a bonus.

Mr McNarry:

No — 75% of senior staff.

Mr Baker:

Sorry, 75% of senior civil servants were recommended to receive a bonus. By definition, I am talking about senior civil servants. The Cabinet Office’s guidance —

Mr McNarry:

I understand that; however, I wish to concentrate on those 50 demotivated people. Were they failed?

Mr Baker:

No.

Mr McNarry:

Are they sent back to school? Do they go for retraining? Are they told the reasons why they are not receiving a bonus and why someone else is?

Mr Baker:

Yes.

Mr McNarry:

Therefore, the people who received £4,000 are told why they did not receive £6,500 or £10,000, and an individual who received only £6,500 is told why he or she did not get £10,000. Is it correct to assume that that is the process?

Mr Baker:

The process of appraisal in each year will involve conversations between the line manager and the individual. You are correct to say that it is a competitive process. The process is designed to be competitive, so that people will, hopefully, be stretching themselves to get into a higher category. In any competitive process, there are perceived winners and losers.

At the end of the process, the permanent secretary will write to each individual and notify him or her of the award that he or she has been granted — the base pay award and the bonus. Typically, the permanent secretary and/or the individual’s line manager — who may not be the same individual — will probably have a conversation with the individual to explain the decision.

Mr McNarry is absolutely right: individuals who find themselves in a category that receives no bonus may be disappointed, or they may not, and they will want to know why and how the judgements were made as to what category they ended up in. Bearing in mind that it is based on relative performance, an individual may find himself or herself in a category of not getting a bonus and still have performed satisfactorily. I agree that it is totally arbitrary to say that 25% of the Senior Civil Service is not performing well.

Mr McNarry:

It is a shocking situation. If 25% of a factory’s staff were not performing well, the shop floor would be in trouble.

Mr Baker:

I am not saying that 25% are not performing well. I am saying that it is a competitive process.

Mr McNarry:

You said that they would be demotivated.

Mr Baker:

They could be demotivated. If one found oneself in that group, one could be demotivated.

Mr McNarry:

That is the same as not performing well.

Mr Baker:

Not necessarily. Some 25% of senior civil servants will find themselves in that bottom category; that is how the system is designed. That does not necessarily mean that they have not performed satisfactorily.

Mr McNarry:

Are any of the 50 people who did not receive a bonus on the same pay scale as the 49 people who received £10,000?

Mr Baker:

Yes indeed.

Mr McNarry:

Are you telling me that some top-notchers are not performing well?

Mr Baker:

That group of staff will be on one of two pay scales — or pay bands. They will be grade 5/assistant secretaries or grade 3/deputy secretaries. Therefore, people in the bottom 25% will be, by definition, on the same pay band as some of those in the other categories.

Mr McNarry:

There is, therefore, great scope for those people to motivate themselves in respect of the competition. Does the head of the Civil Service receive a bonus?

Mr Baker:

I do not know the precise pay arrangements for the head of the Civil Service, because I do not have access to the relevant paperwork. However, I know that the performance management arrangements and the pay arrangements for the head of the Northern Ireland Civil Service are tied into the arrangements for permanent secretary pay in Whitehall. That is all done in Whitehall, and I assume that Sir Gus O’Donnell is the final arbiter on that matter.

Mr McNarry:

Perhaps you will clarify that and let us know. I do not see why the head of the Civil Service would be excluded.

Mr Baker:

I am saying simply that the pay arrangements for the head of the Civil Service are determined in Whitehall — presumably by the head of the Home Civil Service or Sir Gus O’Donnell.

Mr McNarry:

The issue of base pay performance and the basis of how people perform seem to be complicated. I am disturbed about the 50 people who have not been motivated sufficiently — and those are my words — to be awarded a bonus. How is the bonus money divvied up? Is it a lump sum that is divided by 199 — and I stand corrected on that figure?

Mr Baker:

Yes.

Mr McNarry:

Human nature being what it is, is there any possibility that someone will say that the bonuses will be higher if people in various categories are not granted one? If all 199 people received a bonus, the amount of each bonus would be reduced dramatically, would it not? Hardly anyone would be getting £10,000 or £6,500.

Mr Baker:

I shall return to the point on motivation because I may have misled Mr McNarry about that.

Mr McNarry:

To mislead me is a dangerous thing to do. I am sure that you did not do so intentionally.

Mr Baker:

Mr McNarry said that those 50 people were not motivated to get a bonus. I was trying to say that those who find themselves in the category that did not receive a bonus could find that to be demotivating. They were not in that category because they were not motivated or because they were not performing well, but they could find it demotivating to find themselves in that category.

The Chairperson:

To help the Committee understand that point: there is a cohort of 200 senior civil servants, 75% of whom are entitled to some element of bonus. By definition, therefore, 25% are not entitled to a bonus. Does analysis over a number of years show whether there are some people who are consistently in the bottom 25%? If so, what action is taken? On the other hand, is the system such that people look after one another, because they know that over a number of years they will have a three-in-four chance of getting a bonus? In other words, is the bonus circulated? Is it the case that the bonus figure is part of the payment structure, and that people know the arrangements in advance?

My understanding is 75% is the upper limit: however, it seems that the upper limit figure appears to have been settled on, as opposed to any other variation on the proportion. Does analysis demonstrate that each of those 200 senior civil servants can expect, over three or four years, to be included in the bonus, or are some of them consistently in the bottom tranche and missing out on the bonus each year?

Mr Baker:

I do not have that analysis to hand: I do not know what individuals score each year or how that is tracked over time. Based on my own knowledge, rather than detailed analysis, individuals do have an opportunity to get different levels of bonus. Without wishing to personalise the issue, my experience is that I have bounced around those different levels over the years. Perhaps that proves the point that people can move up and down, depending on the circumstances of any given year.

Mr McNarry:

So, you will not be able to buy a Ferrari this year.

Mr Baker:

There never has been a Ferrari, and there never will be.

Mr Baker:

To return to Mr McNarry’s question —

The Chairperson:

Thank you. I wanted you to answer my question in coming to Mr McNarry’s point.

Mr McNarry:

Taking on board public perception, and what members have said today, one needs to try and tie together the pay and bonuses that senior civil servants receive. Given the competitiveness which was referred to; if someone were paid £20,000 a year and received a bonus of £10,000, I would say that that person had done exceptionally well and must have deserved that £10,000. However, if someone were paid £120,000 and received a bonus of £4,000, I would question that, given the size of the base salary. Is there any way that people who are not performing to that extent can be reflected in the pay increase that they receive?

Mr Baker:

I am not altogether sure what you mean. There are two components to the pay award —

Mr McNarry:

Would that be reflected by an increase in base pay?

Mr Baker:

If an individual were deemed not to making a contribution to the organisation, that would be reflected in the base pay award. There would probably be papers defining the criteria to be applied in that situation. The base pay award is also differentiated in order to reward the best performers. If an individual were deemed not to be making as good a contribution as their peers, they may find themselves in the bottom category for base pay.

Mr McNarry:

That is helpful, because the opposite to that is that if an individual is being rewarded and recognised as part of their base pay, why should they be rewarded with bonuses? Are there two opportunities? If a person is in the top 150, he or she gets an increase in salary and a bonus on top of that.

Mr Baker:

Tracking over the past three to five years, one will see that, in the SSRB recommendations and in how those have been applied by the Cabinet Office, the uplift in base pay has progressively decreased, whereas the size of the bonus pot has progressively increased. There seems to be a deliberate strategy on the part of the SSRB to shift more into the bonus element of pay. My original point was that this is all part of the wider strategy, which is based on the premise that continuous improvement will be enhanced and promoted by offering higher financial rewards. Bonus payments are deemed to be one mechanism to achieve that.

Mr McNarry:

It sounds as though this is an internal inquiry carried out by the people who might ultimately benefit from it somewhere down the line — in other words, in-house for in-house. Can anything be learned from what is happening commercially? In other words, the big banks have been paying bonuses, and their shareholders and savers do not have a clue what the performance is like? You are telling us that the judgement made in relation to senior civil service pay is good judgement, but it is difficult to assess that performance.

Is there any hint that the criticism of banks, in particular, and the manner in which they have been paying bonuses — or even the American car manufacturers who have been told to leave their jets at home and work for a dollar a year — could apply equally to what one might suspect is happening internally here?

Perhaps performance is really lamentable and is being covered up on the basis that bonuses are being paid. I still cannot get my head around the reason for paying a bonus. You cannot give us the information — perhaps you can later. If a person has been working so well — what has he been working on, and for what purpose? A person may have ticked all the boxes in relation to political interference, management skills and so on, yet his Department may be in trouble.

Mr Baker:

The first point was that the review seems to be internalised, or that people are taking internal decisions potentially for their own benefit: that is precisely why the Government has remitted recommendations on senior Civil Service pay to the independent Senior Salaries Review Body, which is the starting point for the whole framework. The SSRB has been set up and resourced specifically to look at all those issues in the round: to look at what is happening in the private sector; to look at what is happening in the wider market; and then to make recommendations. To some extent, that should give us some reassurance that there is an independent element to developing the framework for senior Civil Service pay.

If we did not use the SSRB, we may well have to invent some other independent process. If decisions were to be taken locally in Northern Ireland, we would have to invent another process or create another body to do that, and obviously there would be a resource cost for that. Since there is a body already set up specifically with the remit to take those decisions, there seems to be a sound rationale for hitching our wagons to that.

Mr McNarry:

I understand that, but in answering a question from the Chairperson, you said that independent people were brought in to make the decisions on bonuses given to permanent secretaries. Why could that process not be followed when dishing out bonuses of more than £1 million? Between them, the permanent secretaries received £111,500 — we are not allowed to say it, but it seems that as there are 11 of them, they must have received around £10,000 each. Outsiders were brought in for that, yet it was for a lesser amount of money. Here, although similar scales of bonuses are involved, the decisions have been taken internally to dole out £1 million.

Mr Baker:

It is possible to put any system, or process, in place, or to engage an independent element. Speaking for the Department of Finance and Personnel, I know that when the permanent secretary considered the award of base pay and bonuses to senior civil servants in the Department for the year in question — 2007 — he involved one of the independent members of the departmental board. That individual was not a civil servant; he had a background in the private sector. He sat quality assured the recommendations that were being reached.

I am quite sure that there are different ways to introduce an independent element.

Mr McNarry:

Did the other permanent secretaries do that also?

Mr Baker:

I do not know.

Mr F McCann:

Under the present senior Civil Service reward system, is it fair to say that poor performance could potentially be rewarded, provided that it is on a large-enough scale, as the system is ultimately based on relative performance in the senior Civil Service and not on performance in any absolute sense?

Mr Baker:

I missed the point of that question — would you repeat it?

Mr F McCann:

It is about the potential rewards for poor performance that people could receive if the scale is large enough. Poor performance could be outweighed.

Mr Baker:

As I said — and as you commented — the system is deliberately designed to differentiate between different levels of performance; so the best performers get the highest rewards. In the pay strategy that is agreed in any given year, if an individual is deemed to be an unsatisfactory performer, he or she would not get any pay award of any shape or form — either a base-pay award or a bonus payment. The performance management arrangements that are in place provide for such circumstances. If an individual is simply not performing, or is performing badly, that can be taken care of through the normal mechanisms.

Mr F McCann:

Are there any examples of bonuses not being awarded in the context of failures to meet business targets; for example, failure to meet reduction targets in relation to absence or underspending?

Mr Baker:

I cannot say, because I am not privy to the individual performance appraisals of those 200 people. That is an issue between line manager and individuals, and I do not have access to any of that information. I do not know the basis on which individual decisions were taken to award people a top bonus, a level 2 bonus, a level 3 bonus, or a zero bonus.

The Chairperson:

In a given year, if it were decided that nobody would receive a bonus because targets were not reached, would that decision be highlighted?

Mr Baker:

Yes.

The Chairperson:

Presumably, then, the bonus is there to be dispersed on an annual basis, irrespective of performance?

Mr Baker:

Yes. Mr McNarry asked a question that I did not get to answer. There is a defined quantum of the bonus pot. It is a cash amount, and it is a direct arithmetical calculation. The SSRB —

The Chairperson:

The decision really seems to be who is going to get it, as opposed to whether it was earned during the course of the year.

Mr Baker:

You are absolutely right. It comes back to the question of why the figure of 75% was used — it seems very neat. There could potentially be different ways of cutting it. If it were accepted that the bonus pot is the amount that will be paid out in bonuses, it could be decided to distribute it among 5% of senior staff as opposed to 75%. In that case, a very small number of people would receive huge bonuses. It could not be decided that the bonus could be distributed among 100% of staff as that would fly in the face of the SSRB recommendation, but the number of people who get a bonus could be shrunk. It could be denied to a greater number of senior civil servants. That is entirely possible.

Dr Farry:

I assume that that is the only aspect of Government expenditure across the board in which there will never be an underspend? [Laughter.]

Mr Baker:

The arithmetic might occasionally highlight a very slight underspend, but nothing of any substance.

Dr Farry:

Therefore, if a Department has a massive underspend and is underperforming, it can be said that the one area in which there will not be a significant underspend — irrespective of the situation — is the bonus scheme.

Mr Baker:

I do not think that there have been any significant underspends in the bonus pot in recent years.

Mr McNarry:

Does delivering underspend affect permanent secretaries’ bonuses?

Mr Baker:

It may do so.

Mr McNarry:

We have yet to see that. That would be a good one.

The Chairperson:

Let us hope so.

Ms J McCann:

Going back to the point about the 75%, the paper on the senior Civil Service pay strategy 2007 says:

“75% of NICS SCS staff should be eligible to receive a non-consolidated bonus,”

That does not mean that 75% should get the bonus: it must be related to performance. However, you said earlier that 75% should receive a bonus.

Mr Baker:

That might be a case of bad drafting. One hundred per cent of staff are eligible for the bonus — they should all be considered — but only 75% of them will receive one.

Ms J McCann:

Is it always the case that 75% of staff receive a bonus?

Mr Baker:

No. The figure does not have to be 75%: it can vary according to the recommendations that come from the SSRB and the Cabinet Office. They could decide that they want to shrink the number to 50% or 30% or whatever — it could go up or down. As the previous question alluded, a discretionary decision could be taken to give bonuses to a very small percentage of staff.

Ms J McCann:

What I am trying to tease out is that the bonus is not based on performance, and that if that is the case, then it cannot be that 75% of staff must get a bonus every year. Do you know what I mean?

Mr Baker:

I do.

Ms J McCann:

Those staff are eligible for bonuses. If 75% of staff continually receive bonuses, perhaps the performance targets are too low.

Mr Baker:

That may be the case, but the bonus pot is deemed to be an integral part of the overall pay package. That is the way in which it has been constructed, according to the SSRB recommendations. Therefore, it is not a sort of á la carte menu — either bonus pay or base pay — bonus pay is part of the whole package, and it operates as such.

Within the 75% figure, there is differentiation among the staff — those deemed for levels one, two or three bonuses — and that reflects their relative performance.

Ms J McCann:

Following on from that, how does the 75% figure compare to the percentage of junior or middle-grade staff who receive bonuses?

Mr Baker:

I do not have that figure to hand. I do not have access to that information. Pay arrangements for staff below the senior Civil Service are totally different. There is a different pay structure, which is subject to negotiations with the trade unions. It is negotiated locally; it is not part of a national agreement.

Ms J McCann:

Fra McCann mentioned high-level business objectives, particularly sick-leave management. How is that factored in to the personal performance objective of an individual?

Mr Baker:

When the individual and his or her line manager agree objectives at the start of the year, there are usually three categories of objectives. There are business, corporate and capability/capacity objectives. If managing sickness absence and ensuring that the process and procedures are followed feature in personal objectives — as they should — they could fall in to either of the second two categories. For example, if a Department has a corporate target to reduce sickness absence by x amount, each senior manager in the Department will have a contribution to make to that corporate objective. Therefore, managing sickness absence and ensuring adherence to the policies and procedures could feature in the individual’s corporate objectives.

Similarly, sickness-absence objectives could feature in the capability/capacity objectives, because they are about improving the capability of the Department to perform. They also concern efficiency, which is a potential area in which capability can be enhanced. Equally legitimately, sickness absence could feature in that category.

Ms McCann:

Why are some of those important business objectives not being achieved?

Mr Baker:

When an assessment is made of an individual’s performance at the end of the year, all objectives are taken into account. I am not privy to each set of performance objectives, and I do not know to what extent sickness absence features in each individual’s personal performance agreement.

Sickness absence is of great concern to the Committee and to me, because I tend to get held to account for it. In general, sickness absence, while not hitting targets set back in 2004, has been coming down year-on-year. Therefore, there has been an improvement in that area. There has been a significant improvement in the first six months of this financial year compared with the previous year. I know that that is digressing a little from the question. There is no reason why performance assessment should not include sickness absence targets: the full range of objectives is taken into account.

Ms J McCann:

Are you happy that the approach is rigorous enough?

Mr Baker:

Line managers are given detailed guidance on how to apply what is a difficult process. Difficult judgements must be made about people and, inevitably, not everybody gets what they expect from it. It is as rigorous as it can be. However, I have never seen a perfect performance appraisal system. As Mr Paisley Jnr said, everything comes down to personal and value judgements, which are grey areas.

The Chairperson:

Are personal objectives time-bound?

Mr Baker:

Yes.

The Chairperson:

Can the conclusion be reached that someone is on track to achieve an objective which is more than a year ahead?

Mr Baker:

Personal objectives tend to focus on the year in question, because an individual might be moved in the subsequent year. The focus tends to be on the year in hand in order that at the end of that year there is something to review and on which to base a judgement.

The Chairperson:

Setting aside routine management tasks, who signs off on those personal objectives to ensure that they are rigorous and quality-assured?

Mr Baker:

Both the line manager and the individual must agree and sign off on those.

Dr Farry:

I am tempted to mention the approach taken in the service sector by waiters and waitresses, where the customer rates the performance with the size of the tip.

Financial management and people management are two of the six core skills set out in the professional skills for Government competency framework that is regarded as integral to the senior Civil Service staff performance management process. Do all, or most, senior civil servants have agreed objectives within those areas of competence?

Mr Baker:

It depends on the nature of the business. It could be that people work in areas in which they have no responsibility for financial management or big budgets; they may work purely in a policy area — it depends on the nature of their job.

Part of the assessment that a line manager makes at the end of the year is, as Dr Farry suggests, the way in which objectives have been achieved; as well as whether those objectives have been achieved, and whether an individual has demonstrated leadership skills or other competences.

Dr Farry:

Does that mean that a bonus might be paid to a member of staff who fails to meet an objective but makes a decent fist of doing so?

Mr Baker:

I do not know: that is all part of the judgement call, and involves individual circumstances upon which I cannot comment.

Dr Farry:

Fra made the point that this is about relative performance within the overall system rather than the apposite performance of the system. In theory, there could be a massive failure of a Department to achieve its overall objectives, but, within that, relative performance is still being tested. Therefore, some staff could get a bonus because they are performing better than others, even though the system itself is in bad shape. Would the public perceive that as being a very strange set of circumstances?

Mr Baker:

Yes, that is a fair comment.

Dr Farry:

In the private sector, banks, for example, would not be paying out massive bonuses if they were in major financial difficulties.

Mr Weir:

Actually, the banks probably would; in the form of redundancy payments.

Dr Farry:

That is a different context.

Ms Purvis:

My questions follow on from what Stephen Farry and Fra McCann said earlier about underspend. Financial management is one of the core skills against which senior civil servants are assessed. Serious concerns have been raised about the poor performance of senior departmental officials in financial management. Across Departments, there has been a history of inaccurate financial forecasting, late declarations of reduced requirements, and substantial year-end underspends. Over the past four financial years, year-end underspend in current expenditure has increased year on year. The total current and capital underspend for those four years alone has amounted to nearly £1·2 billion. As you know, that issue comes before the Committee.

That excessive underspend means that Departments are not maximising the impact from available resources, which is especially important during the current economic downturn. The excessive accumulation of unspent moneys really undermines the Executive in any negotiations that they have with the Treasury for additional resources for Northern Ireland.

The findings of a report by PKF consultants, which was published in June 2007, underscored the weaknesses and skills gaps in financial forecasting and monitoring in Departments. Is it fair to say that the effective management of public finances is one of the most important responsibilities of senior public officials? Does the evidence not suggest that financial management is not being given sufficient priority in setting and assessing personal performance objectives, including for the purpose of awarding bonuses to senior officials?

Mr Baker:

Obviously, financial management is of great importance; and I am sure that the Committee has addressed the issue on many occasions. I contend that the matter has been given priority, not only in the enhancement of the skills of civil servants at all levels in this area, for which there are various programmes under way, but to improve performance. Great attention is being paid to that issue.

I am not breaching any confidences by saying that the head of the Northern Ireland Civil Service takes into account the relative performance of Departments in financial management and, indeed, absence management when considering the performance appraisals of permanent secretaries and the pay awards made to them in respect of the performance of their Departments.

As I said before, financial-management performance will be factored into the personal objectives and appraisal of individuals in circumstances in which it is appropriate to do so. Not everybody is responsible for managing big budgets; however, for those who are, I expect that sound financial management will be reflected in their appraisals and in the allocation of base-pay awards and bonus payments made to them.

The Chairperson:

When you say “will be”, are you indicating that that does not presently apply? We expect that to be routinely applied.

Mr Baker:

I expect that that is routinely applied as of now. I know that absence management and financial management feature. It is probably wrong of me to personalise this, but my target is to come within 1% of the budget I am allocated at the start of the year, and I am sure that that is replicated around the Department. That reflects the importance that is given to financial management.

Ms Purvis:

Is any account taken of negative findings from NIAO or PAC reports that link failings directly to an individual’s business area of responsibility before awarding performance pay and bonuses to individual senior civil servants?

Mr Baker:

I am sure that all of those factors come into play. As I said before, I am not party to the individual performance appraisals in the system, but a range of factors will come into play. I am sure that if an individual were responsible for an area that was found to have failed, or about which serious criticisms were raised, as a consequence of an NIAO or PAC hearing, that that would be taken into account. I am quite sure of that.

Ms Purvis:

My final question probably involves a simple explanation. Why has the Department of Finance and Personnel paid out more bonuses to staff and therefore more amounts of money?

Mr Baker:

There should be a simple explanation for that. When the Senior Civil Service is treated as a group across all Departments —

The Chairperson:

It is not that they had the chequebook?

Mr Baker:

No, I do not think so. Each Department is given a quota in proportion to the size of the Senior Civil Service cadre in that Department, so DFP may well have the most senior civil servants of all the 11 Departments.

Mr O’Loan:

Land and Property Services is an agency to which the Committee has given a great deal of scrutiny and about which it has a lot of concerns. Without identifying individuals, were any bonuses paid to senior officials in that agency last year?

Mr Baker:

I cannot because I just do not know.

Mr O’Loan:

Could you let us know?

Mr Baker:

I take receipt of the Member’s request, but I do not want to breach data protection policy.

Mr O’Loan:

Absolutely; nor would the Committee expect you to do so.

I do not know whether this point was touched upon earlier, but I noticed that there are huge discrepancies across Departments in the number and profile of awards. They did not seem to correlate with the size of the Department in budget size or the number of staff.

Mr Baker:

There should not be huge discrepancies. We do some number-crunching at the start of the process, so that, in any given Department, the proportion of staff getting a bonus at levels 1, 2, 3 and 0 will be the same in each Department. It really depends on the number of senior civil servants in each Department who are eligible to be considered. The proportion should not differ across Departments.

Mr O’Loan:

That is an issue that the Committee might look at a little more closely.

The Chairperson:

We must consider how to follow that up. Does that complete your questioning, Declan? David wants to return to an issue.

Mr McNarry:

I want to check that the Committee will be given some indication from our guests as to the size of the bonus of the head of the Civil Service. The witnesses did not know that figure, but the Committee would like to know what it was and whether he got one.

Mr Baker:

I take receipt of that request.

Mr McNarry:

We know that everyone else got a bonus: the permanent secretaries, and so on.

Mr Baker:

We try to anonymize the information. Dealing with one individual takes one into slightly different territory. I am more than happy to provide the Committee with information as to how the process —

Mr McNarry:

I understand. I am just asking a simple question. My pay, expenses and allowances are under close scrutiny by everyone: everyone knows it; and I think that I should know the pay of the head of the Civil Service and of any bonus he may receive. That is a fair request.

Mr Baker:

The pay of the head of the Civil Service is probably published in the resource account.

Mr McNarry:

I do know his pay: I do not know the size of his bonus. It would be helpful if the Committee could get that information, just so that it can all be set in context. It is excluded from the information.

For most civil servants, a ceiling of 2% is imposed on the size of annual pay increases. Why are Senior Civil Service pay awards allowed to exceed that 2% ceiling?

Mr Baker:

I believe that that is not correct. The 2006 pay agreement for non-industrial staff below the Senior Civil Service was a three-year deal and it amounted to an increase in the pay bill of 4% per annum. That is 4% in each of the years 2006, 2007, 2008 and up to August 2009. That was the quantum of the annual pay bill rise for the vast majority of senior civil servants in Northern Ireland. The pay bill increase for the Senior Civil Service is determined on an annual basis by the SSRB, and, for the year in question, it was, I believe, 2∙6%. For the current year, it is 2∙5%.

Mr McNarry:

I will give you the information that I have, and we will see whose researcher is right: the UK Government’s public-sector pay policy is that pay should be consistent with the Bank of England in achieving its inflation target of 2%.

In 2007, senior civil servants had a 2∙6% increase recommended by the SSRB, and 2∙5% in 2008.

Mr Baker:

That is correct.

Mr McNarry:

Are we disagreeing about the 2% figure?

Mr Baker:

We are. I can give your researcher details of the Civil Service pay award, which dates from August 2006, lasts for three years and represents an annual 4% increase in the pay bill.

Mr Weir:

It may be Government policy to try to achieve a 2% increase in the pay bill, but a 4% increase has been settled on. That is where the difference in the figures arises.

Mr Baker:

That is absolutely correct.

Dr Farry:

I will slightly reframe David’s about the head of the Civil Service. There are 13 permanent secretaries, including the head of the Civil Service. How many of those 13 permanent secretaries received a bonus?

Mr Baker:

I will take that request away with me.

Dr Farry:

That would give the Committee an indication of what is happening while avoiding personalising the issue.

The Chairperson:

When will the data for 2008 be available, so that the Committee is completely up to date in its consideration?

Mr Baker:

I would hope that the 2008 outturn data will be available later this month, and I will be happy to furnish the Committee with that information.

The Chairperson:

I appreciate that very much.

Mr McNarry:

Are the bonuses an add-on to a pension deal?

Mr Baker:

The bonus payment is non-consolidated, which means that it does not count for pension purposes. Only the base pay counts towards pensions.

Mr McNarry:

Yes, but £10,000 would be a nice wee lump sum for someone to put towards their own pension fund.

The Chairperson:

It would. We could all declare an interest in that.

Mr Baker:

The bonus payment is taxable. I am in a slightly invidious position, and I must declare an interest as a senior civil servant.

Mr McNarry:

We are all bursting to ask what bonus category you are in.

Mr Baker:

I feel slightly uncomfortable sitting here talking about senior civil servants.

Dr Farry:

Your performance today has been very good.

The Chairperson:

Nor did you once take the Fifth Amendment, even under exceptional political difficulties. This is a serious matter, and you were most helpful. The Committee may want to consider whether it needs to follow up on some of the issues raised. Indeed, you have indicated that you will respond to what questions you can. On behalf of the Committee, I thank you for your assistance.

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