From his base at Harvard University, Lucian Bebchuk has spent much of his career probing the vexed issue of executive pay. Bebchuk, a professor of law and economics, has looked at it from every angle – ranging from the extent to which decisions to expand firm size are associated with increases in subsequent CEO compensation, to examining managers’ influence over their own pay.

In his 2006 book, Pay Without Performance, he exposed myriad ways in which CEOs decoupled pay from performance and argued that board members had little incentive to slow the gravy train. The overarching thesis to his work is that it is not how much executives are paid, but rather how they are paid. In essence, he argues that salaries should be linked to performance, and that performance must be validated by robust, independent stakeholders.

I could not help but think of Bebchuk’s thesis this week, as the furore surrounding the salary of the incoming secretary general of the Department of Health grew louder. If Robert Watt gets the job on a permanent basis, and it seems a slam dunk that he will, I don’t have an issue with him earning €292,000. However, I do have an issue with how he, and other leading civil servants, are paid.

To recap, Watt earns €211,000 in his current role as secretary general in the Department of Public Expenditure and Reform. He has been installed, at the instigation of Taoiseach Micheál Martin, as interim head of the Department of Health, while a wider recruitment process is undergoing. If he lands the job, a certainty given the leader of the country wants him to do it and has stated so publicly, his new salary will be €292,000.

The increase has been the source of much political discourse and debate, with opposition parties criticising the manner of his appointment and the size of his remuneration. There are a number of points worth discussing.

First, is Robert Watt worth €292,000? In the private sector, the answer is certainly yes. His time with the Department of Public Expenditure was coming to an end, and having run the department for a decade, he could have easily taken a role with a major Irish company or gone down the board portfolio route.

From a government perspective, the move to the Department of Health makes sense. The department has been allergic to managing budgets efficiently, and there is a strong logic to dispatching the man who has run the spending department to try and hammer it into shape.

Watt is not a public sector lifer. He was appointed a decade ago as part of a strategy to recruit external talent to the upper echelons of the public sector. Most of those who arrived at the time, such as John Moran, have left. Watt stayed, and has remained an independent voice in public debate. He has criticised numerous government initiatives, flagging concerns over the nature of the National Broadband Plan and over the impact over the state’s shared equity “affordable” home plan.

He has also criticised the inability of the Department of Health to manage its costs. Put bluntly, he is not a yes man. Indeed, as the civil servant who allocates budgets to each department, he has probably spent the last ten years saying no.

Guaranteeing salaries, regardless of performance, breeds inertia.

In their book The Wake Up Call, John Micklethwait and Adrian Wooldridge argue that the most successful countries of recent years – and particularly of 2020 – are the ones that have consciously invested in building up the capacity of the state. They point out that in Singapore, for example, top civil servants can earn up to $1,000,000. And the government provides scholarships to young people who promise to enter public service. It’s about raising the rewards, and the status, attached to public service.

This year, the government will spend €87 billion. Of that, €22.1 billion will be spent by the Department of Health. Dealing with Covid has beefed the number up, but even after extracting the Covid allocation, the department has a core annual budget of €20.3 million. It is a monumental sum of money that is not delivering the outcomes that we expect.

We all know this. The government knows this too. Every international ranking highlights the fact that we spend so much and deliver so little. And we also know that the department has never managed to work within its budget – supplementary budgets have become the norm rather than the exception.

This is why Martin picked up the phone and called Watt. If the civil servant can manage the department within its budget, his salary is inconsequential. If he can push through the vaccine rollout plan on time and on budget, his salary will become inconsequential.

If he can ensure that the €22.1 billion is spent properly, then his salary will be inconsequential. Actually, if he does that, we should pay him more.

And this leads to the broader point. Robert Watt will be paid €292,000 regardless of how well he performs. And this the point that Lucian Bebchuk has been making throughout his career. Watt, and other leading civil servants, will receive the same salary if they perform poorly or if they truly revolutionise the system.

Would it not make sense to incentivise public servants to work within their budget and hit their strategic targets? This would have to be independently verified, but would force public servants to move outside of their comfort zones.

How many times have we heard people say that Michael O’Leary should be running the country? It is worth remembering that O’Leary is worth €860 million. He has amassed this by hitting targets, operating within his budget and growing shareholder value.

The same level of stakeholder accountability does not seem to apply to the public sector. Guaranteeing salaries, regardless of performance, breeds inertia. I have no doubt Watt will do a fine job in the Department of Health, but that will be because of his own toil and not because the system incentivises – or demands – it.

The issue is not how much he is paid. Given his background and given the scale and scope of the role, he is arguably worth it. The issue is how he is paid.

Robert Watt

Robert Watt on the Department of Health

Just what will Watt’s priorities be in his new department? Well, in October 2019, he talked at length about the issues in the department during a conversation with Stephen Kinsella for The Currency. He is what he said:

“So the health budget this year, the Minister announced for 2020 €17.4 billion. Indeed that is a 30 per cent increase on the number in 2014. That’s about €3.5/4 billion extra. A lot more money going into the system.

“The big challenge I think for everybody, our colleagues in the HSE, the Department of Health, the political system, people in the Dáil, this group of ministers, future ministers, is how do you get value for money? It’s not just about throwing more money at issues. It’s about actually trying to figure out how can you provide the best possible service for our citizens. In health, that only works if you actually get into the detail because in effect you are talking about dozens, scores, hundreds of different types of services. So the budget will fund disability services. It will fund elective surgery. It funds Fair Deal, it funds A&E, it funds a whole variety of different things.

“When you actually start thinking about the health system – why we want to have a health system which is integrated and where there’s better coordination between the different elements – of course we are funding services which in many ways are very discrete and very different. So in order to understand what’s going on, you have to look at the spending. Fair Deal, that’s going to cost around a billion for this year, or next year. It provides support for X number of people. There is a cost. So for us to figure out, how is that working? Is it delivering? And how sustainable it might be in the future, which is a key issue in terms of Fair Deal, given our demography and other supports that are available for citizens.

“You have to get into the detail you have to lift up the bonnet and that provides insights about what should the policy be, what should the direction be, how can we do things differently?

“The A&E is a good example of how you manage the flow of people turning up at A&E. There was a very interesting study looking at the number of people who, on repeat, came back to A&E within a few weeks of being there before. Why was that? Obviously, in most cases it’s a recurrence of the same condition, the same problem. So how come people end up back in A&E again? Why were they not  able to deal with the GP in a community setting? What happened?

“To be able to look at the data helps the managers to improve the service. It should, because that information can help them do things differently. But also, at our level, I mean in the Department of Health, it can give us more a view on how we should prioritise spending and how we should try and allocate spending.

“But if you think, some of the classic public sector problems are allocated in the absence of prices. We don’t have prices because these are public goods. So how do we allocate in the absence of prices? We need to have much better data, much more of a conversation about what are we achieving and then at our level, at a policy level, we then figure out how is the best way to allocate. Of course that becomes a political process then and there’s a whole variety of interest and other influences that lead to the outcome.

“But at our level, at official level, we need to have an understanding of what we think works and that requires a very detailed examination of inputs, outputs, outcomes in order to have that informed discussion.”