Sir Ian, the gravy train and a very public failure

ONE of the favourite battle cries of government ministers slating the banks for their greed is "rewards for failure". But perhaps before lecturing business, ministers might like to get their own house in order. Yesterday we learned just how big a price taxpayers will have to pay for Sir Ian Blair's failures as head of the Metropolitan Police.

It will cost us £295,000 upfront in a golden "handshake", plus another £100,000 in "perks and bonuses". Then, from February 2010 onwards, we will be paying Sir Ian an annual pension of £168,000 a year - a pension for which the annuity would cost a private pension holder perhaps £3 million.

Whatever happened to the idea that a bonus was something an employee was paid for doing a job well? In the public sector it seems to have become accepted that employees are now due their bonuses however they perform - even if they lose their job because of incompetence. For Sir Ian's pay-off, though annoyingly large, is far from unique.

Take Clive Briault, who in April was forced to resign as managing director of the retail arm of the Financial Services Authority (FSA) after failing to monitor the activities of Northern Rock. Manfully, Mr Briault recognised his failure and resigned. But that didn't stop him receiving £321,000 in "lost salary and bonuses", pension payments of £36,000 and £202,500 in compensation for loss of office. Unbelievably, this is the same government agency which is now going around damning the banks for their excessive remuneration policies.

Or there's Rose Gibb, former chief executive of the Maidstone and Tunbridge Wells NHS Trust. She received a £75,000 pay-off this year after resigning for her failure to control C-diff infection in her hospitals. In all, 90 patients died and the infection was a factor in the deaths of 240 more. Such was the outcry that the NHS did fight her claim for a £150,000 payout. But Ruth Harrison, chief executive of Stoke Mandeville Hospital, which was also racked with a C-diff outbreak, not only received a £140,000 golden goodbye: she was later rehired on a short-term contract organising maternity services at Epsom and St Helier Hospitals Trust in Surrey.

Just what would you have to do in the NHS, short of following in the footsteps of the late Harold Shipman, to leave a senior job without a bonus?

What has got lost here is the link between bonuses and any semblance of success. Bankers did exceptionally well in their boom years, raking in bonuses out of all proportion to their performance. But at least they have been swift to feel the effects of the downturn, with thousands losing their jobs and many more being told that they will receive no bonus this year.

By contrast, senior public figures like Sir Ian Blair have it both ways. When times are good, they use rising private-sector pay as an excuse to jack up their salaries - claiming, often quite improbably, that they could be earning more in the private sector. MPs are some of the worst offenders in this respect - though few Labour MPs have any experience of work in business. As for Conservatives, you only have to look at their experience after the rout of 1997 to see how employable they were. A year later several still had no job whatsoever.

When times are tough, however, public workers do not expect to see their wages cut to match pay cuts in business. Jonathan Ross, currently suspended, is still on a deal worth £6 million a year. Yet commercial television stars have seen their pay slashed over the past year, as advertising revenues collapsed: Carol Vorderman, for example, left Channel 4's Countdown after being told to accept a 90 per cent pay cut.

As for pay, so for pensions. Few public- sector staff take into account their gold-plated pensions when negotiating pay deals. But most of them are paid final-salary pensions, based on a proportion of their salary when they retire, index-linked. Most staff in businesses, on the other hand, are on "money purchase" schemes, whose final payouts are influenced by the performance of their underlying investments. And over the past year the value of many pension funds has fallen by a third or more.

How did the public-sector fat cats get away with their pay rises and bonuses? They did so in part by aping the business world. Until relatively recently, most public administration was performed by civil servants on very structured pay grades, set by the Government. Increasingly, however, the duties of government departments have been hived off to agencies which operate more along the lines of businesses.

Their leaders are called "chief executives" and they are free to set their own pay. This has led to huge inflation as agencies compete with each other for the top jobs. Suffolk county council, for example, recently poached its chief executive from Bedfordshire county council, elevating her salary to more than £200,000 in the process.

The Government defends such competition by arguing that councils and other government agencies behave better when they are allowed to be businesslike. But there is one huge difference between a council and, say, a large retail business: the consumer doesn't get the benefits of competition. However much they might complain, taxpayers have to carry on paying their council taxes to fund the council chief executive's salary. And unlike shareholders, they get no direct vote on the board's remuneration.

If councils and public agencies really want to be businesslike, they will do what tens of thousands of businesses are now doing: cut costs by laying off employees and slashing bonuses for those who remain. Harsh though it may be for people at the receiving end, it is that process of cutting costs which allows businesses to survive a recession and emerge stronger at the end.

Until it does so, the public-sector bonus boom will carry on unabated -whether the recipients have done a half decent job or not. Thus Sir Ian Blair can walk away from a job where he manifestly failed, not just with a big pay-off but being paid a proportion of his bonus specifically for having achieved ethnic diversity targets - while his force is the target of a £300,000 racial discrimination claim by Assistant Commissioner Tarique Ghaffur. It would be tempting to call it business as usual. But this a place where the rules of business have been suspended.