More money, less risk

Private sector firms tend to pay their chief executives far more than their public service counterparts, but do they improve services? Matt Weaver reports

Wednesday September 25, 2002

After examining salaries in the public services and voluntary sector, private sector pay comes as a bit of shock.

In a sample of 50 private companies, either providing public services directly or providing comparable services, three chief executives got paid more than 1m.

The firms provide a huge range of public services from waste management to education, benefits administration to public transport.

Some have recently taken on services that used to be provided by the public sector, such as Annington homes, which leases the Ministry of Defence's huge stock of housing, or Kingston Communications, which took on the former municipally-run telecommunications organisation in Hull.

Others include private finance initiative contractors and private healthcare organisations that hold several public sector contracts. Some of the companies are very big businesses, but by no means all.

Anite Group - the leading supplier of information technology to local government - paid its chief executive, John Hawkins, just over 1m last year. But the company only has a turnover of 199.8m - significantly less than the average local authority's budget in our survey of 100 councils.

Mr Hawkins' 529,000 bonus was worth more than five council chief executives' average salaries put together.

Some of the performance bonuses are the most difficult to fathom. Try explaining to a regular commuter on a delayed-ridden Arriva train why the firm's chief executive, Bob Davies, deserved a bonus of 201,000.

In the financial year 2000-01 the London borough of Hackney outsourced its benefits administration to ITnet, further south, Lambeth council outsourced the same service to Capita. The two private firms had the two worst records in processing new benefit claims of any other council in the country. Both contracts were later terminated.

Benefit claimants in Hackney might wonder why Bridget Blow, chief executive of ITnet, recieved a 121,000 bonus last year, taking her total emoluments to 367,000. Similarly, Lambeth's benefit claimants would be right to question the 426,824 (including a 151,800 bonus) paid last year to Capita's executive chairman, Rod Aldridge.

In the public services heads might roll after such poor levels of service performance but private sector managers are, it appears, judged on financial performance and the returns they generate for investors rather than delivery of service.

Thus, in ITnet's annual report Ms Blow wrote: "We achieved a successful exit from the revenues and benefits contracts with the London borough of Hackney at the end of March."

Sue Goss, a director at public service thinktank the Office for Public Management, said that because private sector chief executives are only judged on financial performance their jobs are actually easier than those in the public services.

"In the private sector there is just one bottom line, in the public sector there are a whole series of bottom lines - you are highly exposed to risk in everything you do or say and you are managing a series of resource constraints in a less-is-more culture," she said.

On average, the private companies we surveyed had a larger turnover than the public and voluntary organisations. The firms might claim that the salaries paid were proportionate to the size and complexity of the organisations run. But the figures do not support this defence.

The average turnover of the 50 private firms was 811.9m, the average salary 391,547. If you remove all 11 companies with a turnover of more than 1bn, the average turnover falls to 264.7m, which is lower than the average turnover for local authorities in our survey. However, the average salary in those private firms only falls to 305,692, while the average chief executive's salary in our 100 councils was 103,860.

For public services union Unison such salaries provide another reason to oppose the privatisation of public services.

A spokeswoman told "The chief executives of those companies moving in on our public services are massively overpaid. These are the very firms that are trying to reduce the pay and conditions of manual workers, that's where the real hypocrisy and unfairness lies."