Top Pay in the Public Sector - Public Administration Committee Contents


6  Identifying the problem: setting pay

112. Several contributors from a variety of backgrounds were critical of the mechanisms in place for determining pay and reward at the top of the public sector, in particular a lack of coherence between different parts of the public sector. Peter Boreham told us:

    NDPB chief executives and non-executives' pay is all over the place. If you were trying to look at how it should be, it should be related to how big is this organisation, how complicated, to what level do we need commercial experience in those kinds of roles and to what extent has responsibility been devolved to those bodies but when you track those factors you cannot translate that into the differentials of pay.[142]

113. The Local Government Association recognised "that there is real political and public concern about … how well the mechanisms for setting top pay are operating".[143] Christopher Johnson told us that "there is no coherent approach to or common set of principles for executive pay in the public sector"[144]; while the spokesman for a trade union representing higher grades in the civil service said that he thought the system was "a mess".[145]

114. The Cabinet Secretary has told us that

    the relativities at the moment are out of sync … When you see the massive disparities within the public sector there is something wrong, and I would say probably the Prime Minister's salary in that is too low.[146]

115. Current arrangements have also had their defenders. Sir John Baker, a former Chair of the SSRB, suggested that the "lack of uniformity in senior pay levels [within the public sector] is a minor problem measured against the advantages and flexibility of diversity" and that "there is a lot that is right in the determination of the remuneration of top-level public service posts."[147] NDPB Chairs, perhaps unsurprisingly, told us that there was at least a "degree of consistency" in how their pay-setting processes operated.[148]

116. On 7 December 2009 the Chief Secretary to the Treasury announced that the Chair of the SSRB would conduct a review of senior pay across the whole of the public sector to report by the next Budget. As an interim measure, the Chief Secretary announced that he would review any proposal for a salary offer set by Government of over £150,000.[149]

Who sets top pay?

117. Pay levels for senior posts across the public sector are set in a variety of ways. In some cases they are set by politicians: usually either central government Ministers or locally elected office-holders, but in a minority of instances by the House of Commons. In others, they are set by remuneration committees of boards, the members of which are often but not always appointed by politicians. The table below gives some idea of the complexity of the situation (the detailed arrangements are set out in Annex A):
—  Type of body —  Who sets senior pay —  Advised by —  Advisers appointed by —  Comments
—  Civil service —  Prime Minister —  Senior Salaries Review Body —  Prime Minister, following fair and open competition —  
—  NDPBs —  Ministers across Government —  Board of each NDPB —  Ministers across Government, following fair and open competition —  In practice, NDPB boards often take the lead.
—  Public corporations —  Board remuneration committee of each corporation —  Government Departments, where these are shareholders —   —  Boards appointed by Ministers, following fair and open competition.
—  NHS (Foundation status) —  Board of Directors —   —   —  Board of Governors appoints Board of Directors
—  NHS (Non-foundation status) —  Ministers —  Senior Salaries Review Body —  Ministers, following fair and open competition —  Applies only to posts within the Very Senior Managers framework
—  NHS (doctors and dentists) —  Ministers —  Review Body on Doctors' and Dentists' Remuneration —  Ministers, following fair and open competition —  
—  Schools (headteachers) —  Ministers (school governors for foundation and grant-aided schools) —  School Teachers' Review Body —  Ministers, following fair and open competition —  Foundation and grant-aided schools have substantial independence in determining starting pay.
—  Police —  Ministers —  Police Negotiating Board —  Ministers/Statute —  Local police authorities have flexibility to award additional payments.
—  Local authority senior executives —  Local councillors —  Local Government Employers —  Local councillors —  About 90% of local councils use a national Single Status Agreement as a basis for setting pay.

118. This overview shows that people in different parts of the public sector have their pay set in very different ways. Politicians often have the final say. Even where they do not, the Government cannot, as one of our witnesses remarked "get out from under saying that at some level it is responsible if not for the precise pay level then certainly for the arrangements that lie behind the way the decision is made."[150]

119. There are substantial differences in approach even for those parts of the public sector where politicians do have the final say on pay. The centralised arrangements for civil servants are very different from the devolved arrangements for NDPB and local authority chief executives. Taking decisions centrally ensures an overview and allows politicians to keep a lid on pay, but it can also make it difficult to provide flexibility where there is competition for candidates with other parts of the economy. Local decision-making allows for this flexibility, but can make it difficult to take account of the wider interest in setting appropriate pay levels across the public sector, and could even encourage pay spirals where different organisations are in competition for a limited range of candidates.

Tensions between centralised and devolved systems

120. These differences of approach can cause tensions and place upward pressures on pay. This is a particular issue because staff moves between different parts of the public sector have become increasingly common. The Civil Service has in recent years been looking to people with experience of the wider public sector to fill some of its leadership roles—and has been increasingly discovering that it has to pay these people more than its own.[151] Christopher Johnson told us that sometimes, these pay disparities were simply too great to afford:

    In my experience in the Civil Service, it proved easier to recruit talent from the private sector to senior roles in the public sector than from other parts of the public sector. Private sector candidates were attracted by the intrinsic value of the work and quality of experience to be gained, and this was a part of the 'package' along with reward. However, candidates from other parts of the public sector already enjoyed intrinsically valuable work and had gained quality experience. The gap in pay between the Civil Service and chief executives in local government and senior managers in the NHS, made it difficult to attract candidates from those parts of the public sector.[152]

121. These tensions can be particularly acute inside organisations such as the NHS, where centralised and devolved pay arrangements sit side by side. A recent report commissioned by the Department of Health noted that:

    … foundation trusts are using their new status and increased freedom to set pay levels ahead of those organisations covered by the [Very Senior Manager] Framework. Median salaries for Chief Executive in foundation trusts and for such posts as Finance Director and Nursing Director, for example, are shown to be higher than their non-foundation trust counterparts; the distribution of the majority of foundation trust salaries is concentrated in a narrower range; and the greater proportion of foundation trust Chief Executives were on higher salaries than their non-foundation counterparts.[153]

    These tensions are examined in more depth as a case study below.
    Case study: National Health Service management

    Three different pay systems apply to different sections of NHS healthcare management, and we heard that the tensions between these different systems have been causing "tremendous problems".[154] Put briefly, pay levels for board-level Very Senior Managers (VSM)[155] are subject to a strong degree of central control, while their equivalents at Acute and Mental Health Trusts, including those with Foundation status, have their pay set locally. Meanwhile, all managers below board level (within almost every NHS organisation, including the vast majority of Foundation Trusts) are subject to the Agenda for Change pay framework, under which a Deputy Director of Finance, for example, could earn as much as £100,000.

    A review conducted by the Department of Health found what was elegantly described as "a broad consensus on uncertainty" on achieving effective movement of personnel across the NHS as a whole "with one sector operating under the controls imposed by the [Very Senior Manager] Framework and the provider sector [Foundation and NHS Trusts] having freedom to set its own rates."[156] This was reflected in the "anecdotal evidence" we received "that NHS foundation trusts and local authorities use their greater pay freedoms to outbid the rest of the NHS for the best managers."[157]

    We have also encountered concern about movement vertically within those parts of the NHS to which the VSM framework applies: "Salaries [for finance professionals in the NHS] below board-level compare well with the private sector, but directors of finance in the NHS are paid much less than their counterparts on private sector boards … Many organisations have struggled to appoint key people, in circumstances where pay is not the only factor. In our evidence to the SSRB this year we intend to explore the views of many assistant directors that directorships are not worth the candle. They don't see the relatively small increase in pay compensates for the career risks and exposure of working at board-level."[158]

    Both employers and senior managers told us that they favoured a move to a wholly devolved system.

    Employers told us: "the general view is that it would be preferable if NHS organisations were all able to manage their own senior pay arrangements. The VSM framework does not have the confidence of the organisations which are obliged to implement it. It is not 'felt fair'. Fully devolved arrangements would facilitate recruitment of the best candidate for a role in any organisation and encourage movement between organisational types. It would remove barriers to recruitment in 'hard to fill posts' and enable organisations to incentivise challenging assignments. Currently, there is a strong disincentive for a successful manager of an NHS Trust or Foundation trust to move to a post in an organisation operating the Very Senior Mangers pay framework. This is potentially restricting the candidate pools for the 'world class commissioning' of patient care."

    Senior managers told us: "We would certainly like to see greater consistency within the NHS. We argue that consistency can only be realistically achieved by giving all NHS remuneration committees the same powers to appoint and remunerate directors as applies to foundation trusts."[159]

    A further concern expressed to us were the relativities between pay for senior healthcare managers and that for top doctors, described to us as "the elephant in the room".[160]

122. The SSRB, while acknowledging the need for pay flexibility to respond to the market value of different skills and knowledge, has mentioned "tensions caused by the fact that pay levels differ between different parts of the public sector" which had led to "complaints from senior civil servants who tell us that they deal with and do much the same work as people in other public sector bodies, e.g. regulatory bodies, local authorities, while being paid appreciably less than those people."[161]

123. The two main effects of such pay disparities are:

  • that those parts of the public sector operating more centralised (and by and large less extravagant) systems of pay find it difficult to recruit from those parts of the public sector with devolved pay arrangements, and
  • that where they do succeed in recruiting such people, it is generally only by paying them more than existing staff, which gives rise to feelings of ill-treatment. As Stephen Taylor has observed, "the greatest source of feeling unfairly treated [on pay] is not the absolute but relative level, and … relativities near to home … are what matter".[162]

Should pay be set locally or centrally?

124. Much of this diversity has come about because there is a genuine tension between the desire of central government to devolve responsibility and yet to maintain control.

125. The argument for devolution is the need for flexibility "to reflect diverse requirements and markets",[163] and the belief that local bodies are "close to the challenge and close to the market".[164] We have heard that "at the very top level, [pay] often needs to be tailored to very specific needs where skills are scarce and real talent perhaps in short supply", with "some top jobs [having] an accent on leadership, some on policy analysis and formulation, some on professional expertise, some on change management, some on the delivery of services, some on presentational skills".[165]

126. All of our witnesses from organisations that currently have local autonomy in setting pay did not think that a centralised system of pay review and determination would suit their organisational needs.[166] Perhaps more surprisingly, the Senior Salaries Review Body agreed, telling us that for them to advise on the pay of chief executives across a range of public bodies would be "too difficult, too disparate a field".[167] Sir John Baker, a former chairman of the SSRB, provided the most colourful evidence against greater centralisation:

    To members of a pay review body the oppressive weight of government control, which only gets heavier and never lighter, imposes frustrating constraints on finding sound and creative solutions to problems with pay levels and systems that inevitably emerge because labour markets, the nature of demands of the work to be done, the organisation of business, are dynamic. Problems and anomalies tend to build up, creating more and more tension until a crisis breaks. These tensions, which will always exist to a greater or lesser degree, would become more challenging if there were even greater efforts made to bring more and more public sector top appointments and senior pay groups within a yet more centralised and regulated system. It would be a gross mistake to impose greater central control to deal with a handful of high-profile outlying cases.[168]

127. There are, however, arguments for greater central control, notably that devolution can lead to inconsistent levels of pay inflation, and to pay disparities that impede the free movement of staff across the wider public sector. Christopher Johnson, describing his experience at the Cabinet Office, noted that the different pay regimes in local government and the civil service "got in the way of our ability to attract people into the Civil Service" and added that "from a citizen and a taxpayer point of view, that cannot be right".[169]

128. Christopher Johnson has told us that the current pay review body system is "too bitty".[170] The FDA trade union described NPDBs as "a law unto themselves" and suggested that a "more 'level playing field' was needed".[171] As a specific example, Jonathan Baume mentioned the Chief Executive of the Qualifications and Curriculum Authority (QCA):

    it is very hard to see how the Head of the QCA should be paid maybe 80% more than, say, the Head of the Department for Children, Schools and Families, for example. What is the logic to it?[172]

The FDA has proposed that "all senior staff in the public sector" could "be brought within the aegis of a Review Body" with the aim of establishing "a basic system of job weighting" to provide more consistency.[173]

129. The 'uneven playing field' problem can be seen in one of two ways: it could either be a result of the Government keeping pay artificially low in those parts of the public sector over which it has direct control, as Sir John Baker suggests, or alternatively a result of pay rising to unreasonable levels in those parts of the public sector with devolved arrangements. It may also be a combination of both factors.

130. The problem is not an easy one to solve. Increasing the pay of permanent secretaries in the civil service to the levels now received by the more highly paid chief executives in local government, for example, would probably be a political non-starter even if there were no budget deficit. On the other side of the equation, central government has relatively few levers with which to seek to reduce executive pay in local government to levels closer to those in the civil service.

131. A one-size-fits-all approach is also likely to have a negative effect on capability in those parts of the public sector where government needs to recruit people with private-sector experience. Regulators, for example, need to ensure that they have a detailed understanding of the industries for which they are responsible. If professional finance and IT skills are in short supply in the public sector, the Government has little option in the short term but to pay close to the going market rate to buy in these skills. If pay regimes do not allow for this kind of flexibility, then other ways will be found of acquiring these skills: through the use of highly paid contractors, for example.

132. We do, however, see room for improvement in the current arrangements. We are attracted to the idea that reward principles could be applied across the public sector, and that a central body might have a role in establishing and reviewing these principles.[174] A central body could be responsible for collating data on pay and reward and providing this data to bodies across the public sector to use as part of their decision-making processes.[175] Such a move could decrease the need for public bodies to turn to private sector remuneration consultancies as their main and perhaps only source of advice on pay.

133. We would also go one step further, and suggest that an independent central body might usefully monitor the implementation of these principles, and report publicly on cases where it felt that serious disparities were developing, whether in specific organisations, or across the public sector.

134. We do not recommend an extension of the existing pay review body system, which makes annual recommendations to decision-makers on pay levels in certain parts of the public sector. We have heard that the current degree of centralisation of pay decisions already causes tensions that make it difficult for different parts of the public sector to respond to local circumstances.

135. We do, however, recommend the establishment of an independent centre of expertise on public sector pay, with a particular focus on executive reward, a Top Pay Commission. This Commission should have a broad remit to collate, analyse and publish information on pay across the whole public sector and, where relevant, beyond. It should publish principles which all public sector bodies would be expected to follow and be able to show that they had followed and benchmarks against which the levels of pay that they set can be judged. With this in mind, the Commission should have the freedom to conduct investigations, on request or at its own initiative, where serious tensions or disparities appeared to be emerging, and to recommend ways of resolving or bridging these disparities.

136. The Commission need not involve creating a new body. Its functions could be merged with those of the Senior Salaries Review Body and it could be supported by an enhanced Office of Manpower Economics. Nonetheless, the setting up of a such a Commission would, inevitably, involve some upfront costs. We believe that ultimately a Top Pay Commission would save public money by reducing the need for public sector bodies to use private sector consultants, and by using the threat of investigation to control major public sector pay disparities.

SHOULD A TOP PAY COMMISSION COVER THE PRIVATE SECTOR?

137. Earlier in this report we discussed what Tony Travers called the "contagion effect" whereby top pay in the public sector was, in part, being driven by spiralling executive pay in the private sector.[176] Polly Toynbee described this as "an inevitable outcome" of increasing private sector salaries and argued that it would be necessary to tackle both private and public sector salary increases if executive pay in the public sector was to be reduced.[177] She suggested that the remit of the Low Pay Commission should be extended to suggest guidelines and benchmarks for both low and high pay across the public and private sectors. She argued that this would give those who hold pay setters to account—shareholders in the private sector or parliamentarians in the public sector—an impartial evidence base with which to scrutinise executive salaries and the relationship between the highest earners and the rest of the organisation.[178] In August 2009 the Government rejected a proposal from the pressure group Compass to establish a High Pay Commission to oversee and review top level pay in the City.

138. Our inquiry was specifically on executive pay in the public sector, and the Top Pay Commission we have proposed would therefore be concerned primarily with the public sector. However, an important function of the Top Pay Commission would be to monitor pay levels beyond the public sector where these have an impact on public sector pay, or on the ability of the public sector to recruit and train suitable people - to identify the extent of the 'contagion effect' identified by our witnesses - and to report on this impact, so that Government and the public can decide what wider action might be appropriate. It would also need to be able to keep an eye on public sector spending which might constitute pay by proxy, such as consultancy contracts and legal fees.

Better accountability

139. We have already discussed some of the coherence problems caused by devolved decision making; and one area where this can cause particular difficulties is accountability, local accountability in particular. Stephen Taylor voiced a common message when writing that "the pay of local government chief executives should be determined by local politicians" on the basis that "if the local populace don't think they get value they can vote for a new lot".[179] He is right, but only partly right, because higher pay may benefit the local population, but be bad for the country as a whole. This has been acknowledged by the Local Government Association (LGA) in its recent advice to councils that they "should take steps to ensure that top pay growth does not move out of line with general pay growth in the economy, unless changes can be fully justified by exceptional performance".[180] Where pay decisions are devolved, as they are in local authorities and in Foundation Trusts, mechanisms are needed to ensure that the impact of any local pay growth on the wider economy is fully taken into account. We envisage this being one of the principles a Top Pay Commission would seek to uphold.

Upwards pressures on pay setters

140. In addition to the evidence we received on coherence, we also received evidence pointing to a number of upward pressures on pay setters in the public sector. In this section we examine some of these pressures.

COMPETITION FOR CANDIDATES LEADING TO SPIRALLING SALARIES

141. Pay inflation resulting from competition for a small pool of favoured candidates appears to be a problem in pockets of the public sector. This was brought to particular prominence by an Audit Commission discussion paper: Tougher at the Top?, which suggested that in some circumstances local authorities were competing with one another for top performers in a way which was driving up the pay of chief executives:

    Higher rates of recruitment of existing chief executives have led to increased turnover rates, additional recruitment costs and wage inflation.[181]

The Local Government Association accepts that "The Audit Commission's research observed … a perception that the appointment of an existing chief executive with a good track record is the best way to improve performance."[182] However, Hamish Davidson argued that pay inflation for local authority chief executives was mainly a result of the changing, increasingly demanding nature of the job:

    the modern role of a [chief executive] of a unitary, Met or City authority is probably the broadest in all of public sector. These are tough jobs. The talent required to be successful in this new model [chief executive] role is now much greater than was the case in years past, and inevitably then, the pool of such candidates of such calibre is small. Candidates of this calibre are in great demand - and this has contributed to their ability to command higher salaries.[183]

142. According to the SSRB, wage inflation of this kind is not a problem within their remit groups "which have clearly defined pay systems". They have, however, "heard anecdotal evidence" of wage inflation "for example where poorly performing local authorities, schools or NHS Trusts compete to recruit chief executives, heads or other senior managers with successful records of improving organisational performance". This has a knock-on impact, in that members of the SSRB's remit groups "increasingly point to other parts of the public sector where pay appears to be higher for no obvious reason."[184] As Christopher Johnson told us:

    Base pay [among local authority chief executives] has risen over the last few years at about twice the rate of, for example, the Civil Service. About a third of local authority chief executives are paid at or above the same level as permanent secretaries, which has made it difficult to attract chief executives into the Civil Service.[185]

FISHING IN A SMALL POOL OF RELUCTANT FISH

143. The TaxPayers' Alliance contends that "the majority of highly paid senior public sector jobs are not affected by a particular scarcity of suitable candidates".[186] Hamish Davidson, however, went so far as to describe this statement as "utter rubbish."[187] For obvious reasons, there is unlikely to be a scarcity of potential candidates for any highly paid job—the key consideration is how to decide whether these candidates are 'suitable' or not.

144. Hamish Davidson argued, that for chief executive posts, "the kind of skills you are looking for are in very short supply" and that "some of these people are not so prone to apply of their own volition".[188] He explained the reasons behind this "dramatic change" [189] in candidate behaviour—particularly among the "strongest and highest profile"[190] candidates—as follows:

    They are worried about leaks, they are worried about undermining the relationship with their leader, they are worried about the knock-on effects of destabilising their organisation if word gets out that they might be leaving.[191]

145. According to his view, the practice of fair and open competition in the public sector, and in particular of taking up current employer references prior to interview, tended to discourage strong candidates from applying for senior public sector roles unless directly approached[192], and that as a result:

    the local government recruitment market (and indeed, at a slightly slower but still inexorable rate, the rest of the senior level public sector recruitment market) is moving towards a more 'private sector' model of recruiting, where although, because of the 'open and fair competition' tenet, roles are still advertised, the working assumption amongst increasing numbers of employers is that the strongest candidates are likely to be generated through headhunting. [193]

146. His conclusion was that "the balance of power in negotiations has shifted from the employer and more towards the candidate when it comes to talking about remuneration".[194]

147. However, he argued that public sector bodies tended to exacerbate this situation through the "inherent conservatism of the appointment process"[195] and by the tendency of public bodies to define the specifications for senior posts so tightly as to limit the pool of potential candidates unnecessarily. He mentioned "the tendency of public sector employers to: write specifications … that require candidates to, effectively, walk on water and perform miracles several times a day", and of recruitment panels tending to "appoint to the lowest common denominator and … conservatively with minimal risk" whatever might be being stated in public about the need to appoint "more people with pace and passion".[196]

148. Peter Boreham agreed that some of the "perceived shortage of talent" driving up pay was "perceived rather than real."[197] This opinion was echoed by the Society of Local Authority Chief Executives:

    What is happening in a number of cases - and we have seen it - is that leaders of councils, often large shires, when they lose their chief exec, publicly say, 'We only want somebody who has been the chief executive of a county council before and it must be an excellent rated county council.' Then you look around and that is nine people, five of whom are nearing retirement. Once you do that, you are going to get spiralling wages. One of SOLACE's positions on this is that councillors are a little risk-averse.[198]

149. Another suggestion is that pay inflation has resulted in part from using more measurable performance indicators.[199] This has been mentioned particularly in the context of the local authority Comprehensive Performance Assessment (CPA) regime, where the "desperate need" for councils to increase their low ratings led them into bidding wars for top Chief Executives:

    Increasingly, there emerged a reluctance to make an internal appointment as Chief Executive and to opt for the external. Now, had the internal candidate been appointed, then the salary could typically be set at the lower end of the range. However, given the increasing trend to appoint 'externally', and given my point about the prevailing culture within the public sector of never taking a pay cut, the inevitable consequence ever increasing salary inflation.[200]

150. There is little to discourage those taking local decisions on senior pay from paying over the odds for a candidate who is a 'safe bet', and very little to incentivise them to appoint someone who might represent better value, possibly internally, who is of potential but with less experience at the top level.

USE OF CONSULTANTS AND HEADHUNTERS

151. Our panel of consultants argued that their work strengthened the hand of public sector pay setters and ironed out some of the problems discussed above:

    I think you need an external perspective …, otherwise you end up either with misinformed decisions or, indeed, the executives themselves pushing for something and the non-executive directors not having enough confidence to push back.[201]

    When I have been into organisations that have been advised by other consultants, I normally find a reasonably well ordered set of pay arrangements. When I walk into an organisation for the first time that has not had access to professional advice, I often, not always, find that pay arrangements are quite a long way out of line with what I would normally expect to pay, sometimes too low but quite often too high, and that is because things have been set in a vacuum without professional advice.[202]

152. However, the work of consultants and headhunters came in for criticism from some of our witnesses. The Institute of Directors thought their involvement was "a waste of taxpayers' money and should be done inhouse" and warned of the risk of "a form of cartel if the same consultancy advises a number of different public sector organisations."[203] The TaxPayers' Alliance wrote that:

    the use of consultancies to advise on pay does little to encourage public confidence in the system or deliver value for money, often acting as little more than an expensive rubber stamp … Note too that recent sharp rises in public sector executive pay is concomitant with the increased use of consultancies.[204]

153. Polly Toynbee agreed that the role of headhunters deserved scrutiny,[205] while the Senior Salaries Review Body (SSRB), which advises the Government on remuneration for senior civil servants among others, noted the "danger that it is in the consultants' interest to set … salaries higher than strictly necessary in order to make posts easier to fill, and even because in some cases the consultants' remuneration may be linked to the salary on appointment."[206] This latter point was denied by the consultants themselves, who told us that they worked on a fixed rate basis for public bodies.[207]

154. Hamish Davidson, a headhunter himself, was critical of the role his professional colleagues sometimes played, describing them as "part of the problem, not part of the solution". [208] In particular he argued that headhunters are "often culpable" by not challenging the unnecessarily narrow person specifications drawn up by public sector bodies, discussed earlier. He suggested that headhunters often went along with such specifications for a variety of reasons, including a desire not to "rock the boat" in terms of their relationship with their client, the fact that a narrow brief means less work for the headhunter and a professional background that shares the public body's view that only a "conventional" candidate could do the job..[209]

155. The Trade Union representing senior civil servants is also of the view that there would "almost certainly" have to be a role for consultancies in the determination of pay for public sector posts, but that this should be a "support and technical" role, rather than a "delegation of decision making".[210]

156. There is clearly a need for public bodies to receive expert advice on executive remuneration and recruitment. However, we believe this could be provided more efficiently and in a way that is more transparent. A Top Pay Commission, as proposed earlier in this report, would provide a central, independent source of advice to pay setters across the public sector and should reduce the need to employ individual consultants on an organisation by organisation basis.

Strengthening the hand of pay setters

157. In the previous section we discussed some of the pressures on pay setters that have led to increasing executive salaries in the public sector. In this section we examine ways in which these pressures could be reduced.

MORE FLEXIBLE RECRUITMENT POLICIES?

158. Fair and open competition is central to public sector recruitment practice, but cultural differences can be an issue when seeking to recruit candidates from the private sector. Recruitment decisions in the public sector, on the part of both candidates and employers, can be relatively protracted. Hamish Davidson referred to what he saw as

    'Byzantine' appointments processes that 'effectively' un-nerve and often end up discriminating against candidates from outside of the public sector, for whom these processes resemble some archaic, process-driven ritual.[211]

159. We recommend that the Government and the Commissioner for Public Appointments examine whether there is any validity to the argument that recruitment procedures to senior public sector positions diverge from recruitment practice elsewhere to the extent that good candidates from outside the public sector are dissuaded either from applying for posts or from accepting offers of employment.

MORE EFFECTIVE AND INDEPENDENT BOARDS

160. Where boards of individual organisations are involved in setting pay, how those boards themselves are recruited and remunerated has been raised as an important issue by both experts and pressure groups:

    If you want to get more black and minority ethnic non-executive directors into the public service, you have to recruit people who have got a day job, and the reality is that if they have got a day job, £290 a day is not going to do it. It also raises the question of diversity of outlook: because if all your non-executive directors are portfolio non-executives or people who have retired, you are not getting the perspective of people who are in work at the moment, who are raising families and who are more representative of the population of the UK as a whole.[212]

    The system of 'remuneration panels' and 'remuneration boards', in which most public sector executive pay is set are inadequate; ordinary taxpayers are rarely represented.[213]

161. Where pay decisions are devolved to individual bodies, the soundness of those decisions on executive pay will depend largely on the strength, expertise and independence of the board members of those bodies. The board members from whom we heard in evidence seemed well-placed to take these kinds of decisions, but we have concerns about whether this is the case throughout the public sector. The TaxPayers' Alliance reflected what we suspect is a common concern among the public, that boards are not always strong and independent enough to take hard decisions on pay.[214] Unless the range of people represented at board level is broadened there is a real risk that they will be limited in their experience and in the challenge they are able to bring to bear to the executive staff of their organisation, on senior pay as well as on other issues.

162. Where pay levels are set by politicians, who cannot be expected to be experts in remuneration, their decisions will depend substantially on the quality and independence of the advice they receive. The independent Top Pay Commission which we have recommended could help to provide consistency of independent advice and to act as a counterweight to private-sector consultancy, as well as a watchdog where individual bodies were tempted to put their own interests too far ahead of those of the public sector more widely.

163. The LGA believes that local councils should "improve accountability through appointment of remuneration committees with members from outside the council". [215] This is in keeping with Christopher Johnson's recommendation that "executive reward decisions—policy and application to individuals—should be made through remuneration committees that include independent members and report to Ministers or authority members or boards, as appropriate".[216] There should be a strong element of independent oversight of executive reward decisions at bodies across the public sector, whether in central government, local government, the National Health Service or elsewhere. Executive reward proposals at all public bodies, including those comprising elected members, should be worked up either by remuneration committees, which should include a majority of visibly independent members, or by independent pay review bodies.

BETTER HUMAN RESOURCE MANAGEMENT

164. There are several reasons why a strong human resources capability is vital to restraining executive pay in the public sector.

165. First, this capability enables organisations to assess more accurately how to structure reward packages to maximise performance and minimise the loss of talent, at least cost:

    it is essential that those making external appointments and negotiating pay packages, are expert enough to secure value for money. More internal expertise may be required here, not least to question any advice received from external recruitment consultants[217]

    awareness of what is happening in the private sector is important, as is careful monitoring of the quality of new recruits and retention rates.[218]

166. It has been suggested to us by professionals in the field that this happens only haphazardly across the public sector:

    only 11 per cent of employers in the public sector have adopted a total reward strategy and … few evaluate the impact of their reward practices on the organisation[219]

    Overall, executive reward in the public sector is not well managed. It insufficiently supports the acquisition, development, management and retention (and exit) of the talent required to provide leadership of service delivery for and on behalf of citizens and to ensure value for money for the taxpayer.[220]

167. Peter Boreham meanwhile suggested that the public sector was not an attractive environment for reward experts to work in compared with the private sector:

    The reality is in the public sector the level of reward expertise within most organisations is limited compared to the private sector, partly because the private sector has exciting toys to play with like incentive programmes and company car schemes, share schemes, and all those things.[221]

168. A consistent and skilled approach to reward is even more important in the public sector than in the private, where excessive executive pay can often be relatively easily absorbed within profits. The evidence we received, however, suggests that reward practice is poorly applied across much of the public sector. The public purse would have much to gain from a more rigorous approach to the management of executive reward across the public sector.

169. Second, it is far cheaper for organisations to grow their own talent than to have to buy it in from outside at a market premium.

    it is very important that the public sector grows talent. The Civil Service is 500,000 people strong - that is a large organisation, by any stretch of the imagination - and ought to be able to be capable of growing a lot of its own internal talent, but that does imply very careful exposure to different experiences through a career which may be outside as well as inside the public sector. So I put a lot of weight on talent management processes.[222]

    It is also very important for councils working alone and in partnerships to do more to develop their most talented employees to take up leadership positions in the future. This will increase the supply of potential leaders.[223]

170. Again, it has been suggested to us that this "is a massive area of lost opportunity":

    The extent to which the public sector, despite the literal explosion of 'leadership development bodies' fails miserably to invest effectively in growing its own talent (especially amongst women and BME communities) is staggering. In this area, the private sector (most particularly within global multinationals) is far ahead of the public sector.[224]

171. In terms of executive pay, it is almost always cheaper to promote from within than to have to go to the market to recruit. We are therefore disturbed by the lack of clear evidence that government is successfully growing its own talent in those areas long identified as suffering from a skills shortfall.

172. We recommend that the Government re-examine the incentives available to those making executive appointments across the public sector to ensure that they reward public bodies who grow their own talent, rather than just encouraging the appointment of stale and expensive serial candidates. This examination should consider the possibility of providing additional funding or powers to organisations that successfully restrain executive pay, as a counterbalance to the temptation to appoint from a small and expensive pool of tried and tested candidates.

173. One difficulty may be that the skills that have been identified as required are very similar to those needed in the private sector, allowing the best-trained public servants to seek better remunerated employment elsewhere more easily than they might have been able to in the past. If the skills required by some public servants are no longer distinct from those required in the private sector, it will become increasingly hard to insulate public sector pay from private sector pay, without losing a great deal of talent.

174. Thirdly, by managing performance effectively, organisations are better able to assess whether they are in fact getting value for money from their people, linking to the performance issues we discussed in Chapter 4.

Making the most of intangible benefits

    Organisations should remember that there is more to an employee's reward package than just money.[225]

175. The fact that the public sector pays its senior people significantly less than their counterparts in the private sector has traditionally been offset by other intangible benefits, including job interest and satisfaction, and a sense of contributing to society, along with the increased possibility of receiving an honour. [226]

176. There are also some tangible benefits beyond pay that are competitive with practice at the top of the private sector, but by no means all:

    Some benefits are competitive with private sector practice, for example, leave arrangements and pension provision, while other elements are below market practice, for example, private health insurance, share plans, car policy.[227]

The SSRB among others also pointed to work/life balance as a potential benefit of public sector employment.[228]

177. Christopher Johnson told us why some senior people in the private sector might want to work in the public sector for less money:

    For example, if you were a senior commercial person, say, in a big organisation like BP or Shell, you could be interested in coming into the public sector because the scale in which you are operating in a commercial role is much more significant than might be the case out in the private sector.[229]

178. Both the FDA and TaxPayers' Alliance pointed to professional autonomy as a more important motivating factor than pay.[230] The TaxPayers' Alliance also pointed to the 'public sector ethos' as an attitude that needed reinforcing:

    Public sector workers often stress that they do their jobs, in part, out of sense of duty; this attitude must be reintroduced into the top levels of the public sector.[231]

We are not convinced that the public service ethos is entirely absent. If it was, senior public sector salaries would be still higher than they are at present. However we agree that this is something that is valuable and is worth protecting, which is - as we discussed earlier - a particular challenge at a time of overwhelmingly negative press coverage.

179. Particularly at a time when public money is in short supply, public sector organisations will need to pay close attention to the low-cost and cost-free elements of reward that they can provide to their senior executives, as well as to other staff—from job interest and satisfaction, to development opportunities, to work/life balance—and to prevent these elements from being eroded. This is a human resources challenge of some scale, which we hope has been recognised.


142   Q 184 [Peter Boreham] Back

143   LGA written evidence Back

144   Christopher Johnson written evidence Back

145   Q 24 - Civil and Public Service Issues [Jonathan Baume] Back

146   Public Administration Select Committee, 2009, Work of the Cabinet Office in 2008-09, uncorrected evidence taken before the Public Administration Select Committee, HC 1078-i, Q 137 Back

147   Sir John Baker written evidence Back

148   Qq 191-192 Back

149   House of Commons Debates, 7 December 2009, vol. 502, No. 11, c. 29 Back

150   Q 71 [Tony Travers]. See also Q 248 [Mike Langley]. Back

151   Hamish Davidson written evidence Back

152   Christopher Johnson written evidence Back

153   Department of Health, 2008, The NHS Very Senior Managers Framework, An independent evaluation by Dr Alan Wright, para. 2.36 Back

154   Q 114 [Dave Evans] Back

155   Described in Annex A Back

156   The NHS Very Senior Managers' pay framework: an independent evaluation, by Dr Alan Wright Back

157   MIP written evidence Back

158   MIP written evidence Back

159   MIP written evidence Back

160   MiP written evidence Back

161   SSRB written evidence Back

162   Stephen Taylor written evidence Back

163   Sir John Baker written evidence Back

164   Q 208 [Dr Anne Wright] Back

165   John Baker written evidence Back

166   Q 208 [Millie Banerjee; Dr Anne Wright]; Q 209 [Tim Melville-Ross]; LGA written evidence Back

167   Q 236 [Mike Langley] Back

168   Sir John Baker written evidence Back

169   Q 124 Back

170   Q 124 Back

171   Q 21 - Civil and Public Service Issues [Jonathan Baume]; FDA written evidence Back

172   Q 21 - Civil and Public Service Issues [Jonathan Baume] Back

173   FDA written evidence Back

174   FDA written evidence; Q 185 [Peter Boreham] Back

175   Q 208 [Dr Anne Wright]; Q 210 Back

176   Q 4 [Tony Travers[ Back

177   Q 3 [Polly Toynbee] Back

178   Q 93 [Polly Toynbee] Back

179   Stephen Taylor Back

180   LGA written evidence Back

181   Audit Commission, 2008, Tougher at the Top?, p. 9 Back

182   LGA written evidence Back

183   Hamish Davidson written evidence Back

184   SSRB written evidence Back

185   Christopher Johnson written evidence Back

186   TPA written evidence Back

187   Hamish Davidson written evidence Back

188   Q 118 [Hamish Davidson] Back

189   Q 119 [Hamish Davidson] Back

190   Hamish Davidson written evidence Back

191   Q 120 [Hamish Davidson] Back

192   Hamish Davidson written evidence Back

193   Hamish Davidson written evidence Back

194   Hamish Davidson written evidence Back

195   Q 148 [Hamish Davidson] Back

196   Q 123 [Hamish Davidson] Back

197   Q 189 [Peter Boreham] Back

198   Q 30 [David Clark] Back

199   Q 81 [Tony Travers] Back

200   Hamish Davidson written evidence Back

201   Q 119 [Peter Boreham] Back

202   Q 170 [Peter Boreham] Back

203   IoD written evidence Back

204   TPA written evidence Back

205   Q 30 [Polly Toynbee] Back

206   SSRB written evidence Back

207   Q 120 [Hamish Davidson] Back

208   Q 148 [Hamish Davidson] Back

209   Hamish Davidson written evidence Back

210   FDA written evidence Back

211   Hamish Davidson written evidence Back

212   Q 148 [Peter Boreham] Back

213   TPA written evidence Back

214   Q 73 [Ben Farrugia] Back

215   LGA written evidence Back

216   Christopher Johnson written evidence Back

217   Sir John Baker written evidence Back

218   Sir John Baker written evidence Back

219   CIPD written evidence Back

220   Christopher Johnson written evidence Back

221   Q 111 [Peter Boreham] Back

222   Q 124 [Christopher Johnson]; also Q 170 [Hamish Davidson] Back

223   LGA written evidence Back

224   Hamish Davidson written evidence Back

225   CIPD written evidence Back

226   Q 101 [Tony Travers] Back

227   Christopher Johnson written evidence Back

228   SSRB written evidence; Christopher Johnson written evidence Back

229   Q 109 [Christopher Johnson] Back

230   TPA written evidence; FDA written evidence Back

231   TPA written evidence Back


 
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