Hutton proposes earn-back scheme for public sector senior pay

PUBLIC SECTOR

Hutton proposes earn-back scheme for public sector senior pay

Senior public servants' pay should be linked to their performance through a system of “earn back”, but not subject to a cap, says Will Hutton in the final report of his independent review into fair pay in the public sector.

Hutton, who is vice chair at The Work Foundation, was commissioned by the Prime Minister and the Chancellor in June 2010, to make recommendations on promoting pay fairness in the public sector by tackling disparities between the lowest and the highest paid in public sector organisations. As part of his review, Hutton was asked “to make recommendations on how to ensure that no public sector manager can earn more than 20 times the lowest paid person in the organisation.”

In his final report, Hutton makes recommendations for a “new settlement for public sector leadership”. Under this deal, senior public servants’ pay will be directly linked to their performance and will be explained transparently to the public. Hutton says: “In return, public service leaders are entitled to expect improved public appreciation of the responsibilities of senior public service roles, and the ethos of public service that motivates them.”

He adds: “No pay system can be fair if it fails to reflect individual performance: so I am recommending that all public service executives are required to place an element of their basic pay at risk, to be earned back each year through good performance. So that pay is seen to be fair, I am recommending a huge advance in transparency and public accountability.”

Hutton has also presented recommendations for a “Fairness Framework for Senior Public Service Pay”.

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Key elements of new settlement

The principal features of the “new settlement” that Hutton has proposed for senior public service pay are:

  • Earn-back pay: Senior public servants’ pay should be more strongly linked to their performance through a system of “earn back” pay. Under this system, executives will have an element of their basic pay “at risk”, to be earned back each year through meeting pre-agreed objectives. Hutton says: “This will allow pay to vary down as well as up with performance, and ensure that public services do not offer rewards for failure”.

  • Improved transparency: All public service executives’ full pay should be disclosed each year, along with an explanation of how it relates to job weight and performance.

  • No arbitrary benchmarks: The government should not benchmark senior public servants’ pay against that of the Prime Minister, and should not impose a fixed limit on pay multiples (such as 20 to 1). But the multiple of chief executive to workforce median pay should be published each year, and any changes explained.

  • Sharing the rewards of greater productivity - gainsharing: To prevent executives monopolising the rewards of productivity increases, and allow all employees who have contributed to share the benefits, government departments should identify ways of offering gainsharing schemes linked to achievement of the efficiency aspects of their business plans. Hutton says: “The Government should also explore options for gainsharing schemes across public services more widely.”

  • Informed debate on senior pay: Citizens need to understand public service executive pay in the context of job responsibilities. To support this informed debate, the Senior Salaries Review Body should publish “Fair Pay Reports” each year, detailing pay multiples across public services.

Hutton says: “Organisations delivering public services should publish their pay multiples each year, and disclose and explain executive pay and how it relates to job responsibilities and individual performance. This information should then be brought together in annual Fair Pay Reports from the Senior Salaries Review Body. This will allow an informed public debate on senior pay: citizens will be able to hold organisations to account on how senior pay reflects individuals’ due desert.”

Fair pay across the wider economy

To make tracking pay multiples normal practice across the economy, Hutton recommends that public limited companies (plcs) should also be required to track and publish their pay multiples – and the government should consider commissioning annual “Fair Pay Reports on plcs” as well as public service organisations.

Hutton says: “The principles of fairness are not exclusive to public services. Citizens are rightly concerned about wider inequalities in society, and question whether the pay of the highest earners is deserved. Discussing top pay in the language of due desert, and by reference to the pay of ordinary employees should be the norm across the whole economy: that is why I am recommending that plcs should also be required to publish their pay multiples each year, to allow citizens and shareholders to hold them to account.”

A final word

"High quality public services are essential to our society and economy and high quality public services require high calibre leaders to deliver them, especially in difficult fiscal conditions. How we pay our public service leaders will have a crucial influence on the sort of public services this country will get. It is essential that senior public servants are adequately rewarded for their contributions, and that the public service ethos – that sense of mission and public duty that motivates many to work in public services – is preserved and respected. But public trust in public services can only be maintained if senior public servants’ pay is fair and seen to be fair." - Will Hutton, Review of Fair Pay in the Public Sector: Final Report.

Want to know more?

Title: Hutton Review of Fair Pay in the Public Sector: Final Report, Will Hutton, March 2011.

Availability: To download the 132-page report in PDF format visit the HM Treasury site at www.hm-treasury.gov.uk/indreview_willhutton_fairpay.htm.