Memorandum from FDA
INTRODUCTION
The FDA welcomes the decision of the Public
Administration Select Committee to launch an inquiry into executive
pay in the public sector. The FDA is aware that in the current
economic environment there is public concern that relates both
to scrutiny of public expenditure and to issues of executive pay
across the economy as a whole. As the recession deepens, the public
has become more conscious of the increasing inequality in the
UK and, while some of the expressions of concern maybe over-heated
or irrational, nonetheless valid questions are now being asked
about reward in both the public and the private sectors. Moreover,
whilst there are significant differences between public and private
employment and the issues surrounding executive pay, there are
some points of congruence.
Further, in the light of the likely impact of the
economic crisis upon public spending, and noting the grim forecast
set out in the Budget about the level of government debt, and
the major reductions in public expenditure thus anticipated, over
the next decade (forecasts which many independent bodies nonetheless
regard as optimistic), the public will rightly question all aspects
of public expenditure and wish to be satisfied that the tax payer
is getting both value for money and "a fair deal".
These concerns are also shared by many public sector
employees themselves. Even those holding senior posts in the public
services are aware of the wide disparities and the apparent lack
of any coherence in pay and reward structures at senior levels
across the public sector. This problem is compounded in the public
mind by the arguments surrounding the future of public sector
pension provision in the context of the collapse of pension provision
in the private sector.
This inquiry therefore offers an opportunity
to help frame a more meaningful and constructive debate about
the executive pay levels since the issue began to be aired widely
last year.
In considering the way forward, the FDA sees
five underpinning principles:
Firstly, reward packages and overall pay levels
should be seen by the Government, employer and taxpayer as "fair".
(There is a concept used in job evaluation of "felt fair"
which, whilst not objective, is nevertheless a useful measure).
Secondly, pay levels should be adequate to avoid
the public service concerned becoming or appearing to become,
an inferior service compared to other parts of the economy. This
means that pay levels must have regard to recruitment, retention,
morale, motivation and capability.
Thirdly, pay and reward should be transparent.
For example, as discussed below, the pay of the most senior staff
in the Civil Service is a matter of public record (within a £5,000
band) and levels are set, and the structure determined, by an
independent pay Review Body. This is not the case for all senior
staff in public sector employment.
Fourthly, there should be a degree of consistency.
This not only underpins fairness but assists in movement around
the public sector as senior staffs are more obviously transferable
without undue salary inflation. The Public Sector Pension Transfer
Club which allows people to move across the public sector and
transfer pension entitlement without significant loss (and which
also applies to MPs who take up office from public sector employment)
is a practical example of this approach.
Fifthly, there should be certainty that once
a structure or agreement is in place, this will not be constantly
changed, particularly for short-term political reasons.
The FDA believes that such principles are best
supported by having autonomous and independent pay determination
mechanisms, which to a large extent the pay Review Bodies currently
offer.
1. Are the right arrangements in place for
setting and monitoring pay and other benefits for top posts in
the public sector?
(a) Are they fair? (b) Are they transparent?
(c) Do they produce the right results?
(d) Do they provide value for money?
(e) Do they inspire public and political confidence?
1.1 In considering this question, and subsequent
issues raised in this inquiry, there is the difficult matter to
consider of what should be understood by the term "public
sector". There is no question that one can relatively easily
identify the Civil Service, local government and the NHS (although
the term "civil servant" is often used to cover senior
managers in both local government and the NHS when issues of reward
are being argued in the media). We can also add the NDPBs (or
quangos) into this framework given that all report through government
departments, and HM Treasury has influence over pay levels set
(see below). The armed forces and the judiciary (and the UK's
parliamentarians) are already covered by the remit of the Senior
Salaries Review Body (SSRB) as are doctors and dentists, prison
officers, teachers and the police by other pay Review Bodies.
1.2 However, this still leaves substantial
room for debate about how wide to extend an inquiry into senior
public sector pay given the ambiguous status of universities,
the need to consider whether the BBC should be considered within
the framework of the public sector or the wider private sector
media industry, and public utilities such as Network Rail and
the Post Office. There are also organisations such as those delivering
the 2012 Olympics which are clearly public sector bodies but for
which the Government appears to have explicitly used only the
private sector as the comparator in setting salaries. The FDA
would welcome debate on how such senior pay in such arms-length
publicly funded organisations might be considered.
1.3 As noted above, there is no question
that the Senior Salaries Review Body, and the other pay Review
Bodies with a remit for senior staff, achieves fairness and transparency
in executive pay for those groups for which it is responsible,
although the Select Committee will wish to be aware of the anomaly
within the NHS where the pay of some Chief Executives, responsible
for Primary Care Trusts, is determined by SSRB but other senior
NHS managers' pay is determined solely by their Trust within a
loose framework set by the NHS.
1.4 A further issue in respect of NHS salaries
is that medical consultants are able to receive "merit awards"
which relate to the valuable contribution that they make through
excellent clinical practice. These graded awards can double a
consultant's salary with the highest award and whilst they are
restricted in numbers they are held by quite a number of staff.
Often, the CEO salary is linked to doctors' pay as it is usually
the greater financial award made and it would allow the CEO to
keep pace with the general trend. The awards however significantly
undermine any concept of parity and appear to remain a closely
guarded "perk" that many are unaware exists.
1.5 However, whilst the FDA does not wish
to argue that pay for individuals such as Chief Executives of
local authorities or of quangos is in any way unfair, there has
been relatively little transparency about their pay determination
arrangements, and little wider understanding of how decisions
are made on overall pay levels or individual reward packages.
1.6 Moreover there is a question not only
about simply the mechanisms used for determining reward but also
the relationship between the levels of pay across different public
sector bodies. Some of the stark differences in pay levels are
clearly undermining public and political confidence.
1.7 Evidence of this concern can be seen
when, for example, in April 2009 HM Treasury issued its annual
"remit guidance" for the use of departments in determining
civil service pay and included within this for the first time
an obligation upon departments that "the proposal for any
pay and bonus arrangements for any NDPB Chief Executives must
be submitted to the sponsored department alongside the organisations
pay remit. In addition any proposals to re-structure the remuneration
package of a Chief Executive must continue to be referred to the
Treasury". It is also apparent that Ministers are not confident
about pay levels set for local authority Chief Executives in the
light of recent statements by John Healey, Minister for Local
Government.
1.8 In the Civil Service, the salaries of
all Permanent Secretaries and Director Generals (Grade 2s) are
published in their department's annual report (given that all
these individuals are members of their department's management
board). However, local authorities are currently under no obligation
to publish the salaries of very senior staff and where they are
published there is no immediate explanation of why salaries differ
between authorities. Although many London local authorities refuse
to publish data on pay, the Chief Executive of Islington earned
£152,500 as salary in 2007-08 whilst the Chief Executive
of Lambeth earned £193,075 in salary over the same period.
There may well be a very straightforward explanation of the differences
between those salaries of what are similar local authorities but
there is no way of knowing.
1.9 Problems also emerge in comparing pay
in the Civil Service. Whilst most civil servants promoted internally
have pay levels which, whilst differing, can be assessed and are
within the parameters set by the SSRB there are significant differences
between the pay of internally promoted members of the Senior Civil
Service and those in comparable SCS jobs appointed from outside,
even from the wider public sector. The Select Committee has seen
the evidence submitted to SSRB by the FDA and Prospect, and the
reports of the SSRB which have highlighted these differences.
1.10 In summary, far too often the Civil
Service has focused on recruiting a particular individual and
subsequently offering as a starting salary whatever may be required
to persuade that individual to take up a civil service post (sometimes
at significantly higher levels than the salary earned by the department's
Permanent Secretary) rather than, as in most organisations at
most levels, setting parameters within which the department is
prepared to pay a successful candidate, and ultimately leaving
it to the candidate to decide whether to take up an offer of a
post at the pre-determined salary. This has been highly wasteful
of public expenditure but has also eroded the integrity of the
pay arrangements in the SCS and caused significant problems for
morale.
2. Does there need to be consistency regarding
these arrangements between different parts of the public sector?
2.1 It has been noted above that there is
no obvious consistency between different parts of the public sector.
In the coming period consideration should be given to establishing
a more "level playing field" to help to avoid unnecessary
salary inflation and facilitate movement across the public sector,
as well as helping to allay public concern. This will be however
a very difficult task.
2.2 There are two aspects to this issue. Firstly,
there is the more straightforward issue of the level of annual
increase on whatever salary is in payment. Those public sector
staff covered by pay Review Bodies already receive a similar level
of annual increase given the framework set by the Government in
its annual evidence to individual Review Bodies, and their terms
of reference. Using the SSRB as an example, the Government requires
them in determining an annual increase to consider factors such
as "the need to recruit, retain and motivate suitably able
and qualified people to exercise their different responsibilities;
regional/local variations in labour markets and their effects
on the recruitment and retention of staff; Government policies
for improving the public services including the requirement on
departments to meet the output targets for the delivery of departmental
services; the funds available to departments as set out in the
Government's departmental expenditure limits; and the Government's
inflation target" (SSRB remit).
2.3 The second, more complicated, aspect
is seeking to achieve some degree of relativity between different
posts across sectors. In turn, the first step towards this would
be greater relativity within individual sectors, in particular
in local government where as already noted Chief Executive salaries
differ considerably. There would then need to be a gradual realignment
of pay levels more widely which would probably need to be underpinned
by a process of job evaluation.
2.4 The FDA is not arguing that there should
be one pay structure or job evaluation scheme (or a complex of
evaluation schemes) operating across the public sector given the
many different accountabilities that senior managers and professionals
face across the public sector. However, it would be possible for
all senior staff in the public sector to be brought within the
aegis of a Review Body (which might require establishing new bodies
eg for local government, or significantly extended the remit of
the SSRB), and through this route it is not inconceivable that
a basic system of job weighting could be extended across the main
functional areas of the public sector that would enable those
responsible for pay setting to determine a framework within witch
a pay level could be established. Even without a formal job evaluation
mechanism, it is possible to adopt some of the underpinning concepts
of job evaluation, such as the size of responsibilities and the
degree of autonomy and decision-making, to assist in pay determination.
2.5 Given the considerably greater scrutiny
that is likely that is to be brought to bear in the coming decade
on public sector reward, such an approach may be the only way
of allaying public concern.
3. Does there need to be comparability of
pay between top posts in the public sector and equivalent posts
in the private sector?
(a) If so, how should equivalent posts in
the private sector be identified?
3.1 An even more difficult question than
that of pay relativities across the public sector arises in seeking
to determine relativities between the public and private sectors.
There is experience of such an approach in the Civil Service.
Until 1996, the pay of what is now the core grade of the Senior
Civil Service (Assistant Directors or Grade 5's, who were not
then under the aegis of the Top Salaries Review Body but instead
had their pay determined by collective bargaining between the
FDA and HM Treasury) was adjusted every four years on the basis
of a "levels survey".
3.2 In summary, the Office of Manpower Economics
(which acts as the secretariat to all of the pay Review Bodies)
oversaw a process by which consultants designed a job evaluation
system for the particular exercise and then compared a range of
civil service posts with the pay of private sector posts that
appeared to be comparable in function, selected by the consultants.
An assessment was then made of the overall reward package of a
particular private sector post compared to the reward package
for a comparable civil service job. Although time-consuming, this
four-yearly exercise did enable civil service posts to maintain
a relationship with pay in the private sector that also allowed
the Civil Service to compete adequately in a wider market.
3.3 The annual level of any pay increase
between the four-yearly "levels exercise" was then determined
by an annual pay "movements" index which was based on
a basket of increases awarded to private sector workers. This
meant that public sector annual pay increases were broadly in
line with those in the private sector and seen to be fair across
the wider economy. It would be easy to restore such an index.
3.4 Were such an approach to be considered
again, it would also be important to look at the reward package
on the basis on lifetime earnings (both in work and in retirement)
rather than simply at work at that moment. The FDA believes that
this would demonstrate that, as far as the Civil Service is concerned,
what may appear to be a better pension arrangement does not fully
compensate for the difference in salary during the working career.
3.5 Ultimately the Civil Service, or rest
of the public sector, cannot isolate itself from the outside labour
market pressures completely, nor should it be seen to be chasing
short term market movements one way or another. A balance has
to be struck between rewarding public servants fairly so they
will feel valued and not be constantly looking for opportunities
elsewhere, and the need to reflect concern over the use of public
money.
4. Is there evidence of executive wage inflation
caused by public sector organisations competing with one another
for candidates?
4.1 The FDA has highlighted the growing
gap between the pay of internally promoted Senior Civil Servants
and that of other senior public sector staff, as have the SSRB
and Civil Service Commissioners. This is one factor in the "dual
market" referred to in paragraph 1.9, as the Civil Service
has recruited externally and found itself paying higher salaries
to new entrants from elsewhere in the public sector. The Government
has also referred recently to wage inflation in local government
as a "market" has developed for Chief Executives and
other senior managers.
5. What role should consultancies play in
the determination of pay for top public sector posts?
5.1 There would almost certainly have to be a
role for consultancies in the determination of pay for public
sector posts, just as there is in supporting the existing work
of pay Review Bodies. However, this must be seen as a support
and technical role for organisations such as pay Review Bodies
rather than a delegation of decision making to management consultants.
Any other approach is only likely to exacerbate public and political
concern.
5.2 Many local authorities currently employ consultants
to help set senior pay levels, but there is no obvious transparency.
6. Is the balance right between executive
pay and other benefits? eg bonus, pension
6.1 Consideration does need to be given
to the different elements of public sector reward. The current
Government has fostered the extension of performance related pay
arrangements for many public sector workers, together with a major
extension of the use of bonuses.
6.2 The use of such bonuses has in practice caused
considerable reputational damage to senior managers in the public
sector, even where such bonus arrangements, as in the SCS, bear
no relation either in size or in their framework to bonus arrangements
usually operating in the private sector. (The SCS bonus system
is simply a method for distributing a percentage of the annual
pay increase but in a way that is cheaper to the tax payer because
it does not incur "on costs" for the employer such as
a pension contribution, and is in reality a form of variable pay).
6.3 Many tax payers fail to understand why
someone should be recruited at a salary well above the national
average and then receive a bonus for simply doing the job they
have been employed to do. As an example, delivering an aspect
of the Olympic preparations by July 2012 rather than January 2013
is at the core of the job itself, not a welcome addition. (And
it is, as an aside, noticeable that the Government has not proposed
the use of either performance related pay or bonuses for Ministers
themselves).
6.4 Performance related pay is now common
at even the most junior levels of employment, but as with bonuses,
the FDA can find no evidence that there is any impact on performance
and such forms of pay are often as much a demotivating factor
as a boost to morale.
6.5 There are more subtle motivating factors
for senior managers and professionals, including the "public
sector ethos". Put simply, most senior public servants are
very committed to their work, want a fair level of pay and a reasonable
pension, and the restoration of professional discretion and autonomy
(and less political scapegoating) are far more important than
bonuses. A fuller analysis of the problems associated with performance
pay and bonuses for the SCS has been set out in the FDA's evidence
over recent years to the SSRB which the Select Committee has seen.
Further, evidence of the corrupting influence of bonus systems
in the finance sector has been all too publicly displayed over
the past year.
6.6 The FDA can find no evidence to justify
the extension or continuation of such arrangements in the public
sector and would welcome their phased withdrawal in the coming
years. This has to be in the context of resolving the long term
pay issues for the SCS rather than simply abolishing one aspect
of the reward mechanism.
6.7 The aspect of reward that has raised
the greatest public concern and political debate is pension provision.
Whilst all of the public sector pension schemes have been reformed
and have reduced costs in recent years, they currently have similar
structures even if contribution levels and benefits, together
with some other technical aspects of schemes, differ slightly.
All are defined benefit schemes and, moreover, pension schemes
in the public sector operate in the same way for staff at all
levels. For example, a Permanent Secretary is a member of the
same pension scheme as an Executive Officer paid a tenth of the
Permanent Secretary—only the size of the pension differs,
not the quality of benefits. The major change has been the introduction
in 2007 of a career average (but still defined benefit) scheme
for all new civil servants in place of the final salary scheme.
6.8 Moreover, not only has the cost of public
sector pensions if anything reduced in recent years, defined benefit
schemes in the private sector are similar in scope and employer
cost to those in the public sector. However, the vast majority
of private sector workers who are in a pension scheme at all are
now in defined contribution schemes which offer considerably poorer
benefits than defined benefit schemes, and the closure of many
private sector defined benefit schemes, and rapid erosion of pension
provision more generally in the private sector, has led to criticism
and at times resentment of public sector provision. (It should
be noted though that the exception to this rule in the private
sector is usually at senior executive level where very generous
defined benefits schemes are still often found, as the excesses
of Sir Fred Goodwin's pension entitlements at RBS have all too
vividly illustrated).
6.9 The FDA believes that the current public
sector pension provision is fully justified, and affordable in
the long term. Most of the media criticism is economically ill-informed,
and the answer to the problems of private sector pension provision
should not be a rush to a lowest common pension's denominator,
an "equality of misery", but to address the need for
better pensions for private sector workers. The pension is also
an integral part of the reward package for senior public servants
and any attempt to remove or dilute it would inevitably create
an inflationary pressure on the other elements of the pay package.
7. Do the pay levels for top posts in the
public sector have a direct impact on the performance or qualities
of the people filling those posts?
(a) What impact do the performance or qualities
of the people filling top posts in the public sector have on the
performance of the organisations for which they work?
7.1 Clearly, high calibre candidates with
a proven track record are likely to be able to secure higher pay
levels than less experienced or slightly less capable colleagues.
Moreover, many of the skills necessary to manage large public
sector organisations have a market value in the wider economy,
particularly once the economy recovers from the current recession.
However, the FDA has not seen any evidence one way or the other
that establishes a direct link between the reward package and
performance.
7.2 That said, obviously some senior executives
have stronger leadership capabilities or, for professionals, greater
expertise in their particular field, that can benefit the overall
performance of the organisations in which they have a senior role,
and the FDA has been supportive of work to enhance leadership
and management capabilities in public sector bodies.
8. Is there an appropriate benchmark or ceiling
for top public sector salaries—eg the salary of the Prime
Minister, or a factor of average pay?
8.1 In considering the question of relativities
in the public sector (including the possible use of a simple framework
of job evaluation), the FDA has focussed on the problem of relativities
between different public sector senior managers and professionals.
However, we recognise that any such an approach is also likely
to have to take account of the remuneration package for elected
parliamentarians, although it will be difficult to address this
until decisions are taken on the remuneration for MPs more generally
in light of the scandal of MPs' expenses.
8.2 However, elected politicians are not in a
conventional employment situation and the FDA is wary of trying
to establish a straightforward correlation between the reward
package for politicians and that for senior public sector executives.
There was historically a link between the levels of MPs' pay and
that of a certain grade of civil servant (Grade 6/Senior Principal).
However, in practice this led to distortions in the civil service
pay arrangements as changes felt necessary for the efficiency
of the pay system were extremely difficult to implement because
of their political implications.
8.3 Successive governments have not helped
this discussion by pegging back the levels of the salaries of
MPs and Ministers (including the pay of the Prime Minister) in
many years as a political gesture, as we now know relying on extensive
expenses regime to "cushion the blow". This has over
the medium term been a very short-sighted strategy and has left
Ministerial pay at a level that is not necessarily comparable
to relevant public sector roles.
8.4 It is not obvious therefore that one
single benchmark is a sensible mechanism, but rather senior pay
should be considered holistically and a better appreciation of
fair relativities introduced in line with the principles set out
in the introduction.
9. Can England and the United Kingdom learn
from the experience of other countries or the devolved governments
in this area?
9.1 The FDA is not aware of any such experience
that would be helpful to this inquiry.
April 2009
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