Hutton reviews public sector pay levels

Public sector / 10 December 2010

The interim report is out and it’s sure to keep the subject in the spotlight for the next few months, says Sue Weekes

The Fair Pay Review will make its detailed recommendations on the definition and implementation of a pay multiple aimed at addressing the pay disparity in the public sector in March 2011. The interim report, however, was published on 1 December and has ensured that the debate will continue to rage on.

Will Hutton, economist and executive vice chair of The Work Foundation, was commissioned by the Government in May to lead a review of fair pay in the public sector. Taking the lead from the private sector, executive pay in the public sector has risen faster than the pay of median and low-earners, creating great disparity. The interim report states that greater complexity and risk in senior roles have exerted upward pressure on pay and, while recruitment from the private sector is still limited, the instances where it has occurred have contributed to senior pay inflation. It also claims that autonomy from central government control, which exists within universities, foundations trusts and so-called 'arms-length bodies', is associated with higher executive pay and further autonomy may compound this situation. Governance arrangements alone, the report concludes, will not be enough to reassure the public that senior public sector pay is fair across the board.

If you're a 50-something earning £200,000 in the public sector compared to a 20-something earning £10,000 pounds, the true multiple could be more like 40 times because you've got the value of the pension benefit, so multiples are always a difficult one.

Mark Childs, director, Total Reward Solutions

“The basic concept of tracking pay dispersion within boundaries is where concern with fair pay must lead," says Hutton. "There is a strong case for public sector organisations having to comply with, or explain why they do not comply with, a maximum pay multiple, such as 20:1. This would demonstrate fairness by reassuring public opinion, address a problem of collective action across remuneration committees, and benefit organisations’ productivity."

A private problem?

 It's fair to say that the pay gap between the lowest and highest earners in the public sector is nothing like the chasm that exists in the private sector. The average pay ratio between the top executive of most public sector organisations and the lowest paid employee is below 12:1, whereas pay for median FTSE 100 CEO executives is 88 times the UK median wage. But Hutton points out that some of the "arms race character" of top private sector pay determination is showing signs of reproducing itself in the public sector. "Moreover the range of top pay deals across the public sector has little coherence or relationship to the public’s priorities in generating genuine public value," he says. 

Duncan Brown, director of reward services at the Institute for Employment Studies, says the report gives an excellent analysis of the 'real' situation in public sector pay, but doesn't think the 20:1 multiple cap approach is necessarily the best solution. "They don't take account of some very different types of organisations and history suggests they can have some perverse effects, for example, encouraging inflation up to the cap, and the contracting out of low-paid work," he says. Brown adds that alternatives could include pay bands for senior jobs across the public sector. "Where these are not in place, for example, higher education and non-departmental public bodies (NDPBs), is where you have seen the highest top pay inflation. Where they are, for example, senior Civil Service, then senior pay has grown at or even below inflation." He also reckons that the Senior Salaries Review Body could have an expanded role to set standards and principles and research and monitor pay outcomes. 

Browns stresses though that there is a need for all organisations to monitor their pay differentials and suggests most remuneration committees at the moment don't know what these are. Pay differentials are also "inescapably related" to gender pay gaps, he says, "as high-paid mostly men at the top have been earning proportionately more each year than mostly low-paid women at the bottom of the earnings distribution."

Fixing things

Mark Childs, director of reward consultancy Total Reward Solutions, believes a fixed sum cap might be more appropriate. "If you're a 50-something earning £200,000 in the public sector compared to a 20-something earning £10,000 pounds, the true multiple could be more like 40 times because you've got the value of the pension benefit," he says. "So multiples are always a difficult one and you can have an endless debate about what the multiple is and who is the lowest paid. Other governments have talked about multiples but have ended up with limits."  Hutton says that key issues of the pay multiple approach need to be resolved including all of the elements of reward that would be included and if, indeed, 20:1 is appropriate for all organisations. He is also acutely aware that whatever is put in place walks the fine line of creating value for the public but doesn't damage the public sector's ability to attract and retain talent. 

Childs stresses that any framework needs to have some sophistication of understanding of the labour markets in which senior public sector roles operate. "You need to look at who you are likely to lose people to and where you are likely to hire them from," he says. "If you are in a senior role in a specialist area, for example the Nuclear Decommissioning Authority, then there aren't alternative public sector employers so you will probably need to recruit someone from the private sector like a power generation company."