Chief executives in State sector trailing in salaries league

THE combined sales turnover for the top 12 commercial State sponsored bodies in Ireland amounts to over £5 billion. Between them they employ almost 68,000 people. The salaries of the chief executives of these organisations set by the Glee son committee range from £42,000 to £75,000 per annum.

Compared with salaries for chief executives of similar sized organisations in the private sector (based on the 1995 IMI Salary survey), these salaries are low.

They are, in fact, discounted by between 36 per cent and 64 per cent when compared with the upper quartile of private salaries, between 20 per cent and 56 per cent when compared with the median level of private salaries and between 5 per cent and 47 per cent when compared with the lower quartile of private salaries.

According to the Gleeson guidelines published in the 1992 report of the Review Body on Higher Remuneration in the Public Sector, the boards of these organisations are entitled to pay their chief executives 10 per cent above the guidelines and an additional 20 per cent performance related bonus.

If all of these organisations were to pay their chief executives the full amount allowable, the majority of them would still be below the median level of comparable private sector salaries. Only three of the 12 would be at, or slightly above, the median.

The Gleeson guidelines used the principle of discounting the salaries of chief executives of public sector organisations with respect to their private sector counterparts because of what are referred to as ". . . differences in relation to factors such as job security, decision making responsibility, accountability and general exposure to risk".

The implication was that public sector chief executives were in more secure employment, had less decision making responsibility, less accountability and were less exposed to risk than their private sector counterparts.

State sponsored bodies are a mixture of a number of different organisational forms. Some are corporate bodies set up by acts of the Oireachtas (such as ESB, CIE, Bord na Mona, and IDA Ireland), some are public companies (such as Aer Lingus and ACC) and others are limited liability companies (such as Telecom, An Post, and Coillte).

Organisational form has implications for the way in which the Minister may dispose of, or privatise, these organisations, with consequent differences in risk and security of employment for the chief executive. It also impacts quite significantly on the freedom of the chief executive to make decisions as there are frequently constraints built into the legislative instruments used to constitute these bodies.

These constraints refer to pricing policies, market practices, employment policies, pay bargaining policies and other areas. The acts of the Oireachtas which were used to set up these bodies specifically curtail their ability to maximise profits.

For example, Telecom Eireann, An Post and CIE are required to keep prices for services at a minimum level, sufficient to cover costs and to provide for prudent reserves; Coillte is required to produce sufficient revenue to cover all costs and to provide a fair remuneration to capital and similarly, Bord Gais is required to deliver a fair return on capital employed.

The mixture of pricing conditions within which these bodies work, therefore, needs to be borne in mind when comparing private and public sector performances and, consequently, in determining remuneration.

Diversity of organisational form and legislative constraints, therefore, significantly complicate the establishment of direct comparisons between chief executives of public and private sector bodies. They are not in the business of maximising profits for shareholders.

Frequently they were set up to provide services which the private sector would not or could not provide and with objectives that went beyond strictly commercial criteria.

In a period which has seen major restructuring of organisations within the public sector, especially in the commercial State sponsored sector, and a growing demand for even more change, the job security of the individuals in question can no longer be as clear cut as it was in 1992.

More and more chief executives are being offered shorter, fixed term, contracts. The organisations they are managing are having to compete in an increasingly global economy. Performance criteria are being set closer to private sector measurements, requiring of the chief executives a high degree of commercial acumen, business development and entrepreneurial skills.

These demands require an ability to adapt to change at an ever increasing pace. Organisations are now reforming, reshaping and reinventing themselves at a faster rate than ever before. The pace of this change is likely to increase. This will in turn put pressure on the question of ownership in a context of ongoing search for increased efficiency and effectiveness.

There is likely to be an increase in the rate of privatisations that will take place over the next four years. Many organisations already see themselves in a transition phase towards privatisation. As new chief executives are recruited there is likely to be an increase in the tendency to offer fixed term contracts at or near the levels of remuneration available within the private sector.

The next report of the Review Body on Higher Remuneration in the Public Sector is about to be published. It will probably be known as the Buckley guidelines. The criteria set out in that report will determine our approach to remuneration of chief executives of State sponsored bodies and other senior public servants until the turn of the century in the year 2000.

It is highly likely that in the intervening period, given the pace of change, the position of chief executives within State sponsored bodies will have changed very significantly. This needs to be taken into account when calculating the renumeration policies to be applied and in the context of attracting, retaining and motivating the right calibre of individuals to manage these enterprises through a period of change.

While the general principle of comparison between private and public sector chief executive remuneration practices is perhaps the only practical methodology to apply, the application of discount policies may not be as clear cut as it once was.

Managing public sector organisations is a highly complex undertaking, performed under significant constraints in an increasingly global competitive marketplace. It is not clear, therefore, that a strong argument can be made for continuing to discount the salaries and remuneration of chief executives of State sponsored bodies with respect to their private counterparts.

Where an organisation is engaged in a high degree of commercial activity, requiring significant entrepreneurial activity and business development, it is more appropriate to benchmark the chief executive's remuneration against the private sector counterpart.

In cases where fixed term contracts are being offered, it will be necessary and advisable to fix remuneration at, or very close to, private sector levels. This will be necessary in order to attract, retain and motivate the right calibre of individuals to the posts. Contracts have already been offered to attract chief executives to some State companies including Aer Lingus, Telecom Eireann and ICC Bank.

In organisations undergoing a clear transition period towards privatisation, the remuneration of the chief executive should be adjusted on a phased basis closer to the private sector level in order to ensure that it is at the right level as privatisation becomes more likely or imminent.

Finally, organisations involved in significant commercial growth through acquisitions and expansion should set the remuneration of the chief executive at private sector levels. In the current situation, it can happen that the chief executive of the acquiring company ends up on a lower salary than that of the chief executive of the acquired company. This is clearly inappropriate.