Top Pay in the Public Sector - Public Administration Committee Contents


Conclusions and recommendations


Introduction

1.  It is clear that there is no consensus on the issue of top pay and reward in the public sector. Commentators and experts have markedly different views on the issue: the commentators considered the experts to be part of the problem, while the experts considered the commentators to be ill-informed. (Paragraph 3)

2.  The first obstacle to coherence in setting public sector pay is confusion about what constitutes the "public sector". It is clear that there are many people who are paid with taxpayers' money who are not in what is traditionally considered the public sector. Similarly, there are people who would be regarded as being in the public sector who are not paid with taxpayers' money. When we launched this inquiry, we made clear that we would focus on civil service posts and on public appointments made by Ministers and by the Crown. These posts are indisputably within the public sector, and remain at the centre of our inquiry. However, the fact that boundary lines between the public, private and third sectors are blurred rather than clearly demarcated means that it would be not only wrong but impossible to look at public sector pay in isolation from pay elsewhere in the wider economy. (Paragraph 14)

Is Public Sector pay too high?

3.  Too often, the debate about top public sector pay carried out in the media is reductive and relies upon taking individual examples of "inflated pay" out of context. A more considered look at the statistics and other evidence shows that the issue is not a simple one: top pay in the public sector can be both significantly too low and much too high, depending entirely on perspective. Judged against the private sector, the public sector has exercised considerable restraint on executive pay, both in terms of the amounts paid and (with the occasional notable exception) the rate of increase. But pay for public sector executives has been increasing far more quickly than average pay in the economy as a whole, a fact that has inevitably fuelled anger amongst some taxpayers. (Paragraph 27)

4.  Public servants who earn more than the Prime Minister are very well paid indeed. Reward at this level deserves a clear and public justification, and close and sceptical scrutiny. But any proposal to use the Prime Minister's salary as an absolute cap on public sector pay would be little more than a political stunt. Public servants are recruited from very different labour markets, and the pay they are offered needs to reflect those markets, even if it cannot match them. Prime Ministers pay themselves at a rate determined by politics more than by responsibility, and their earnings in retirement can if they wish vastly exceed their earnings in office. (Paragraph 36)

5.  The extent to which individual public and private sector salaries are comparable is difficult to establish and will vary from post to post. The influence of private sector pay on public sector salaries is also felt in other ways, such as through the knock-on effects of spiralling private sector salaries over recent decades. This influence is especially evident in those areas where there has been a drive towards recruiting more public servants from the private sector, for example to fill skills gaps in information technology and finance. (Paragraph 52)

6.  It is in the interests of public sector executives to 'talk up' their marketability in the private sector, just as it is in the interests of private sector executives to talk up their incentive to move overseas. With this in mind, it is perhaps unsurprising that those setting pay may have wanted to err on the side of caution when public finances were reasonably provident. Paying slightly over the odds risks wasting a little public money. Paying too little risks wasting a lot of public money trying to motivate those staff who have stayed while attempting to recruit replacements for the most competent staff, who have left. Against a background of budget cuts, the need for more stringency in setting salaries is clear. However it would be particularly damaging if talented managers able to deliver substantial savings left the public sector because of pay reductions that would contribute relatively little to deficit reduction. (Paragraph 53)

7.  It is important that pay setters have access to appropriate benchmarks when negotiating senior executives' contracts and ensure that comparisons with the private sector are used appropriately. There is a strong argument for undertaking this benchmarking process centrally and in a way that is independent of the pay setters themselves. This is an argument we return to later in this report. (Paragraph 54)

Reducing the deficit

8.  Proposals to cap pension payments to senior executives in the public sector go somewhat beyond the scope of this report. Such proposals deserve close attention, but a cap will only be effective and worthwhile if it is fair on the people affected, if it is sustainable in terms of recruitment, retention and motivation, and if the savings that it produces are genuine and significant across the public paybill. (Paragraph 62)

9.  Given the level of the budget deficit, the announcement of a short-term pay freeze for senior public servants alongside a cap on all public sector pay increases was not unexpected. The arguments for such a move are less about the levels of pay themselves and more about saving money and ensuring that the public sector is seen to be 'sharing the pain' of recession fairly. (Paragraph 66)

Performance and reward

10.  Where highly paid public servants fail to perform effectively, they should face the very real prospect of losing their jobs without any kind of generous pay-off. Clearly, assessments of performance will need to be sophisticated and well-informed, given the potentially serious consequences for the individuals concerned. In particular, assessments of individuals' performance should not be simply correlated from overall organisational performance, as many other factors may have influenced organisational success or failure. (Paragraph 74)

11.  Regardless of the arguments for and against a greater proportion of senior salaries being directly linked to performance it is clear that such a move would not be acceptable in the current political and economic climate. The word "bonus" has acquired a toxic quality and become associated with unjustifiable reward - despite the fact that the eligibility for such payments is generally given instead of increases in base pay. (Paragraph 83)

Respect

12.  We are concerned by the consistent media demonisation of senior people in the public service. Continued negative media coverage is likely to undermine one of the main intangible benefits of public sector work: a sense of doing valuable and valued work for the public good. In the absence of this sense of respect, the public sector is likely to have to pay more, rather than less, to encourage talented people into senior roles. (Paragraph 87)

13.  The Government, politicians in particular, need to stand behind and explain the decisions they have taken on senior pay when these are challenged. The Government has a responsibility even when pay is set locally: it should support the outcomes produced by the pay systems it has established. (Paragraph 88)

Transparency

14.  We do not see how the publication of more exact remuneration figures for senior public sector executives, including separate breakdowns of salary and bonuses, could constitute a genuine breach of their privacy, as long as they were given adequate notice of the intention to do so. This information is after all already required of directors of listed companies in the private sector. We recommend that disclosure of top public sector salaries should be brought more into line with the requirements for listed companies, with the amount received in both salary and bonuses published along with explanations as to why bonuses were paid. (Paragraph 95)

15.  We welcome the Government's intention to bring the publication requirements for senior remuneration levels in local government bodies in line with those for central government. This should, as we recommend earlier, mean that full details of top local government salaries and bonuses should be published. (Paragraph 98)

16.  We strongly support the idea that transparency should be broadly consistent across the public sector: it would be inconsistent and potentially unfair to require the earnings of one group of public servants to be disclosed at a level not required of other public servants. (Paragraph 103)

17.  The proposed changes to local government remuneration disclosure will bring about a position in which there is a broadly comparable level of transparency across the public sector. It is at least a starting point for consistency which is an improvement on the status quo. (Paragraph 105)

18.  However we believe transparency can go further. We recommend the routine disclosure of the remuneration of all public servants earning above a certain amount, in the region of £100,000, not just members of management boards. We heard arguments for disclosure at lower salary levels; whilst we understand why people may be interested in this data, it would be considerably more costly to produce and would be disproportionate, especially where we are talking about mid-level managers. (Paragraph 106)

19.  We also see value in providing a brief description of how an individual has earned the level of remuneration being disclosed. This could help the public to come to a more informed view on the value for money being provided by their most highly paid public servants. (Paragraph 107)

Consideration of pay conditions more widely

20.  Decisions on senior pay should take into account the earnings, conditions of employment and job security of other employees of the same organisation. We accept that simply publishing a ratio in isolation could be misleading, but we recommend that public sector bodies should be required to declare how the earnings of their senior people relate to the earnings of their other employees. (Paragraph 110)

A Top Pay Commission

21.  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. (Paragraph 134)

22.  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. (Paragraph 135)

23.  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. (Paragraph 136)

24.  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. (Paragraph 138)

25.  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. (Paragraph 139)

Reducing pressures on pay setters

26.  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. (Paragraph 150)

27.  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. (Paragraph 156)

More flexible recruitment policies?

28.  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. (Paragraph 159)

29.  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. (Paragraph 161)

30.  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. (Paragraph 163)

Better human resource management

31.  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. (Paragraph 168)

32.  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. (Paragraph 171)

33.  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. (Paragraph 172)

34.  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. (Paragraph 179)

Conclusion

35.  Action to restrain public sector top pay will ultimately be effective only if similar restraint is shown in the private sector. (Paragraph 185)


 
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