Sir Fred Goodwin’s Pension: Pay for Performance?

One thing that the current financial crisis ought to do is raise a serious debate amongst public policy makers about pay for performance – in the private and public sectors.

The scandal of Sir Fred Goodwin (50) walking away from his job as RBS chief executive with a pension starting immediately and worth £650K per year for life – as RBS posted the worst losses in British corporate history (£24.1bn) – obviously raises questions about how leaders of private, and by implication public, organisations should be rewarded. In this case it is not even being rewarded for short-term success – the scale of the losses, if not the exact amount – was already apparent when Sir Fred pocketed his ‘golden parachute’ last October.

In most walks of life making reckless decisions with other people’s money in order to make huge personal gains would be considered a crime of negligence at best and fraud at worst. For some reason in Britain the norms that the rest of us are supposed to work to don’t seem to apply to bankers.

But the problem doesn’t just apply to the leaders who so recklessly wrecked their companies – we have also seen other banks wanting to pay out bonuses to lower ranking staff for doing a ‘good job’ whilst the ship was steaming full-speed ahead for the iceberg. But this raises serious questions about the disconnect between localised performance and the global performance of the organisation. A great deal has been written about ‘alignment’ – getting strategy and incentives aligned from top to bottom in organisations. What this crisis tells us is that doesn’t work and raises serious issues about whether it can ever work in the way the rhetoric of ‘alignment’ suggests.

More than a decade ago the OECD carried out a study on ‘pay for performance’ in the public sector and found that even at the top levels there was often little connection between what a public leader was being rewarded for and what the organisation they ran was supposed to be achieving. rewards lower down the organisation are even more tricky to ‘align’.

Now the pay issue has spilt over into the public sector, with a Minister, John Healey, announcing plans to force local governments to publish the pay packages for their chief executives. He said “We’ve seen in some councils’ salaries spiralling, we’ve seen some big pay-offs for failure, and that can’t go on.” It is true that LA salaries have increased and it maybe that some aren’t justified, but as for evidence of “pay-offs for failure” in local government – I have seen, so far, little evidence of this and Mr Healey doesn’t present any. Not only does this initiative seem to go against the Government’s supposed commitment to localism – yet another dicktat from Whitehall to Townhall – but it has all the hallmarks of a politician trying to jump on a bandwagon and gets his name in the papers, rather than a serious policy initiative.

That is not to say that the salaries of top public officials ought not to be a subject of legitimate public interest. They should be. But one thing we can be pretty sure of – as the Whitehall mandarins prepare the legislation to force local government to disclose this information, they won’t be slipping in a clause to ensure it applies to top Civil Servants too. If they were it might be possible to take it a bit more seriously.

see also Call to strip title from Sir Fred

One thought on “Sir Fred Goodwin’s Pension: Pay for Performance?

  1. But the issue isn’t really Fred Goodwin (why should we continue applying the soubriquet when his supply of knightly virtue is so limited?)…it’s the scheme of checks, balances and performance audit which ought to have surrounded him.
    The banking crisis show just how ineffective is ‘corporate governance’ in public companies, let alone limited liability partnerships. Company boards are a conspiracy; shareholders’ meetings a sham; the rights of the ostensible owners of companies largely irrelevant. And aren’t the public sector lessons also about governance and the relationship (if any) between structures of governance and executive performance.
    What little empirical evidence there is goes in several directions. There are virtually no reliable propositions to be advanced about the organisation of boards or trusts or local authorities and their performance, assuming we can agree on a set of measures for that.
    But Colin, you are right to have a go at John Healey They clip on the BBC Ten O’Clock news exhibited a minister jumping on a bandwagon, which is never an attractive spectacle.

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