PUBLIC SECTOR
Hutton calls for 20:1 pay ratios in the public sector
No public sector executive should earn more than 20 times the salary of the lowest paid employee in their organisation, other than in “exceptional cases”. That’s one of the main findings to emerge from the Fair Pay Review’s interim report.
The review, which is being led by the Work Foundation’s Will Hutton, was commissioned by the Prime Minister and the Chancellor in May 2010 to make recommendations on promoting pay fairness by tackling disparities between the lowest and the highest paid in public sector organisations.
In his interim report Hutton said: “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.”
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But adopting such a pay ratio would be no easy matter. As Hutton explained: “Key issues of definition would, however, need to be resolved including the elements of reward included within the multiple, the level and base of the multiple, and what flexibility if any should be allowed to exceed the multiple. It may not be desirable to apply a single multiple to all organisations: different multiple norms for different types of organisation may be more appropriate.”
What’s more, it would need careful design to avoid harming recruitment and retention, creating perverse incentives and failing to respond to differences between organisations.
For Hutton, it should not be an absolute cap with exceptions on a “comply or explain” basis. “Organisations would be able to exceed the multiple in exceptional cases but would have to explain their justifications for doing so,” said Hutton.
Fairness framework required
Whilst the public sector needs better governance and transparency, this alone will not be enough to give the public real assurance over senior pay. Hutton believes a “comprehensive fairness framework” for senior remuneration is required that covers:
better governance and transparency
disclosure requirements based on a pay multiple
a fair process – “pay should be set according to consistent rules applied equally to all, independent decision-making and opportunities for staff to make their case”
better use of performance pay and “real proportionality between pay and individual performance”
a renewed emphasis on the competitiveness of executive labour markets.
What you will find in this report
A definition of a “clear and principled approach to fairness”.
The current position on executive pay and pay dispersion.
An analysis of recent trends and drivers of executive pay in the private and public sector.
The role of a maximum pay ratio in containing pay dispersion.
The case for a fairness framework for public sector pay.
Defining “fairness and fair pay”
The report defines “fairness and fair pay” as follows:
“Fairness should not be understood as simply about equality of outcomes. Individuals’ due desert will vary according to their differing contributions and choices, though the influence of chance and external circumstances should be minimised. Fairness also requires that processes as well as outcomes must be fair.
"Fair pay must therefore be proportional to individuals’ contributions and set by fair pay determination processes. The value of individuals’ contributions will reflect both the weight of their particular posts and their actions and efforts within them.
"Proportionality in pay implies limits on pay dispersion: a maximum pay multiple would be one mechanism for maintaining those limits.
"As well as being morally desirable, fair pay brings instrumental benefits to organisations, by supporting greater employee engagement and morale, and to society as a whole by helping to avoid inequality traps and assisting social mobility and incentives to productive work.”
Top pay in the public sector
Executive pay, in much of the public sector, as well as the private sector, has been outstripping the pay of median and low earners. “This has created greater pay dispersion within organisations over the past decade,” Hutton said.
According to the report, the average pay ratio between the lead executive of most public sector organisations and the lowest paid member of staff is below 12:1. By comparison, pay for median FTSE 100 CEO executives is 88 times the UK median wage.
In 2009, the top 1% of earners in the UK included anyone with annual salaries of £117,523 or more. Currently, there are around 20,000 public workers earning above that figure. Some 4,000 of these are managers, while most of the rest are NHS medical professionals.
Average annual salaries for executives in the following sectors in 2008 were:
Heads of universities - £200,800
NHS hospital trust chief executives - £150,000
Local authority chief executives - £117,500
Principals at further education colleges - £110,700
Armed forces 4* Generals - £170,800
Permanent secretaries - £160,000.
Amongst public arm’s length bodies there are a small number of individuals paid over £300,000, including the heads of the Olympic Delivery Authority, Transport for London, Nuclear Decomissioning Authority and Ofcom.
Arms race
According to the report, senior executive pay in listed private companies rose by around eight times between 1986 and 2010. Pay benchmarking between firms locks them into a kind of “arms race”.
Hutton said: “Some of the arms race character of top private sector pay determination is also showing signs of reproducing itself in the public sector. On the occasions when the public sector does recruit from the private sector it has to pay significantly more for staff, creating knock-on inflationary pressures.”
He added: “The public sector should be cautious about simply adopting ‘best practice’ from the private sector, as private sector pay practices and corporate governance have not delivered proportionality in pay. On the contrary, listed companies have seen something close to a revolution in executive remuneration in recent decades.”
Autonomy risks generating wage inflation
The government is committed to further devolution of power to individual institutions - take, for example, academy schools and foundation trusts - as part of its public service reform programme. But Hutton warned that there is a risk that this will generate further pay inflationary trends: “There are signs that in parts of the public sector that have more autonomy - such as universities, foundation trusts and arms length bodies in general - there are significant upward pressures on senior pay and, before the pay freeze, some increasingly eye-catching settlements.”
Final report due March 2010
In its final report in March 2011, the Fair Pay Review will make detailed recommendations on the definition and implementation of a pay multiple and other elements of a wider fairness framework in the public sector.
A final word
“The public sector walks a fine line. It must create value for citizens by attracting and retaining talented individuals – otherwise it will become a second-class sector of the economy. But equally it has to be vigilant about ensuring value for money. I believe that the fair pay principles articulated in this Review offer a way of walking that fine line – and assuring the public that their public servants are fairly paid, and that if there are examples of high pay they are within clearly understood boundaries.” – Hutton Review of Fair Pay in the public sector: Interim report.
“There is also a broader case for private sector organisations to follow the public sector example and at the very least track and report on pay dispersion from year to year in a fully transparent manner. This would allow shareholders and wider stakeholders to monitor pay dispersion, and when it increases, to hold management to account for achieving performance.” - Hutton Review of Fair Pay in the public sector: Interim report.
Want to know more?
Title: Hutton Review of Fair Pay in the public sector: Interim report, December 2010.
Availability: To download the 128-page report in PDF format visit www.hm-treasury.gov.uk/indreview_willhutton_fairpay.htm.
Enquiries can be addressed to email: fair.pay.review@hmtreasury.gsi.gov.uk.
--> See also "Rein in the fat cat salaries or see public services suffer even more", by Will Hutton, The Observer, 5 December 2010. To read the article online visit www.guardian.co.uk/commentisfree/2010/dec/05/will-hutton-private-public-sector-pay.