Rail 690: Bonus culture incompatible with railways

In the various railway history books I have written, there is a recurring theme of the fraught relationship between government and the railways. Whether it is in America or Australia, India or Italy, there is always tension in that relationship and a lack of clarity over responsibilities. Somehow, though, in Britain, that relationship has always been even more difficult and controversial than elsewhere and that is very much in evidence in the current fiasco over Network Rail bonuses.

To say that the government was floundering is to be kind. Rather, it was clear that policy was being made on the hoof and the issue had been left to drift after last year’s fuss.

This tale has to start with the previous government and the mistake made when Railtrack was pushed into administration. Gordon Brown, despite the advice of the then Transport Secretary Stephen Byers, refused to simply renationalise Network Rail and instead created the current structure of having a ‘company limited by guarantee’ with no shareholders. It was quite clear to observers like Tom Winsor, the Rail Regulator at the time of the Hatfield crash and now the scourge of the police, that this meant there was no oversight of Network Rail. Sure, the regulator was supposed to provide some targets and ensure the organisation was efficient but essentially it has no effective sanction as demonstrated by the ridiculous fines it imposes when there are breaches of the network licence which leave directors’ pay untouched.

Network Rail was set up in the heady noughties when bonuses were seen to be a vital component of any go-getting organisation. Labour ministers, so enamoured with the neo-liberal model of capitalist enterprise, ensured that the Office of Rail Regulation (or Rail Regulator as it then was) actually made it a requirement of the licence agreement with Network Rail that there had to be an incentive scheme.

This is to misunderstand the nature of the railways. The concept of big bonuses based on performance spread from conventional companies, where they were part of the trend of rewarding managers who boosted ‘shareholder value’ rather than developed long term business. A moment’s coherent thought – a rarity in the corridors of Whitehall as far as railways are concerned – would have made ministers realised that there were fundamental problems about giving railway managers bonuses. Railways, for example, kill people. Over the past few years there has been historically small numbers, with only one passenger death in an accident over the past decade, but most years do see a few trackworkers being killed. Therefore it is inevitable that managers will be seen to be getting bonuses in years when some of their fellow workers have been killed.

Moreover, the provision of railway infrastructure is not a growth business. I remember the desperate attempts by those marketing Railtrack shares to show that the railways would grow by using Thameslink 2000 as the kind of project that would lead to more business. It was ludicrous since the increase represented a tiny proportion of the overall network but demonstrating such growth was seen as essential to attract purchasers for the shares.

The bonus incentive scheme for Network Rail, therefore, can be seen in that context. David Higgins, the current chief executive, comes from that culture and has said recently that such incentives are vital to attract ‘the right people’. This is patent nonsense. The top Network Rail managers are already on big six figure salaries – £300k for the executive directors is a starting point – and the notion that they need an ‘incentive’ to do a better job, or to meet targets strikes me as ludicrous. Lower down, too, staff are paid bonuses, but this seems to me daft as well. The ability of any signaller, for example, to so affect overall performance that they would make a difference to their end of year bonuses is unlikely.  Again, surely, signallers, as proud railway employees, would never dream of doing anything but their best to ensure the smooth running of the railway.

The truth is that railways are more akin to a boring utility than a capitalist enterprise at risk of failure if the right products are not developed and which requires real entrepreneurs. Moreover, Network Rail is essentially a government run company dependent on subsidy, another reason to question the decision to create a bonus scheme.

Possibly, through fear of bad publicity arising from excessive bonuses, the government decided that the ‘incentive’ scheme would be determined by a committee of three non-executive members of Network Rail, one of whom was to be the government-appointed special member of the board. Any scheme, though, had to go before the full membership – the 100 or so members of Network Rail who are supposed to have the same oversight as shareholders.

For some years, a very competent director, David Bailey, was the government’s representative on the board but in recent years Mike Mitchell, who was the senior civil servant in charge of the railways until last year, decided that it was inappropriate for him to sit on the Network Rail board. Consequently, oversight was clearly cursory or non-existent as the bonus scheme allowed the directors to double their salary, an extraordinary situation in an industry like railways where there is little scope for rapid change.

The ridiculously high payments did attract the attention of Philip Hammond, the then Transport Secretary last year, but while he complained from the sidelines, Network Rail – which was in a state of transition between the chief executives – blithely ignored him.

However, clearly changes had to be made and this is where it gets complicated, so much so that it seems that even the present Transport Secretary, Justine Greening, and her advisers do not quite understand the situation. The members have often – not least in this column – been castigated as supine and only interested in enjoying high tea with the directors in three star hotels every quarter. However, there is a group of members who have been causing trouble by raising questions over bonuses, and ensuring that opposition politicians are well briefed on the issues.

Following the fuss over bonuses last year, a new incentive scheme involving payments of up to ‘only’ 60 per cent of salaries rather than 100 per cent was passed by an Extraordinary General Meeting of the members in March last year. However, because of concerns by the members that there had not been a proper consultation with the Office of Rail Regulation, this had to be resubmitted to an EGM, the now infamous meeting that never took place on February 10.

During the weekend running up to the meeting, Ms Greening got herself into a terrible tangle. She told the BBC’s Sunday Politics Show that she was angered by the bonuses and would turn up at the meeting, as a member, and vote against them. This was clearly daft. The Transport Secretary is not just one vote in a 100 as she has far more influence given the state’s role in putting £4bn annually into the industry. Indeed, she did not seem to realise that she had the power to appoint a special director who would be one of three members of the remuneration committee.

I claim a small role here. I went on the BBC News Channel at 7 30pm on the Sunday, having been briefed on the special director provision, and suggested that this is what she should do. Lo and behold, by the 10 O’clock news, the policy had changed according to a report by the excellent BBC political correspondent Gary O’Donoghue saying he had been briefed that Greening intended to appoint a special director.

This is not a criticism of Justine Greening who, across the industry is seen as being a listener with a much more open approach than her jackbooted predecessor. Everyone speaks well of her and it was, apparently, her instigation to reduce the fares rise. It is, though, a criticism of those who advise her and highlights yet again the need for a rail agency separate from the dysfunctional Department for Transport to oversee the railways. Clearly, she has been very poorly advised by her civil servants who should have ensured that she knew about her own powers long before she was exposed on TV as not understanding them.  In the event, on the Monday Network Rail then rather belatedly said that the directors had agreed to forego their bonuses for this year and give the money to a safety fund, a decision that had been taken some time previously. So poor Greening had been left to attack bonuses on national TV which were not going to happen and without being properly briefed by her own advisers. I suspect there may have been some teacups flying in the DfT afterwards.

The NR EGM has now been adjourned “sine die” until the ORR and Network Rail come up with a bonus scheme that Greening can support in public. I suspect that is impossible. There is also a row going on between the DfT and the Treasury over exactly how much Greening can so before she has exerted so much control over Network Rail  that its £20bn debts come back onto the government’s balance sheet. Back in the early days of Network Rail, there was a brief period when it became a nationalised company precisely because the then government had determined the incentive scheme.

Let’s get this straight. Higgins and co are not bankers who have cocked up royally and yet trousered vast bonuses. They are honest railway managers doing their best to cut costs and run an efficient railway. I might not buy Higgins’s nonsense about needing incentives to find the ‘right people’ but nor do I think he deserved being targeted in the same way as Fred the Shred. Given the impossibility of creating an acceptable scheme, the only possible course of action would be for Greening, the ORR and Network Rail to get together to scrap the incentive scheme, if necessary leavening it with a small rise in wages, and therefore kill off the issue in the long run. Otherwise every year the railways and the poor transport secretary are going to find themselves under attack and unable to respond.

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