Memorandum from Christopher Johnson
PERSONAL BACKGROUND
I welcome the opportunity to give evidence to
the Committee and to assist with its inquiry in to executive pay
in the public sector. For over 20 years, I have worked with leading
management consultancies, including Hay, Towers Perrin and currently
Mercer, providing reward advice to large organisations in the
private and public sectors in the UK, US and other countries in
Europe and Asia. Between 2005 and 2008, I was the Director at
the Cabinet Office responsible for employee relations and reward
across the Civil Service, which included responsibility for senior
civil service reward.
Currently, I lead Mercer's human capital business
in the UK, which includes provision of advice on executive remuneration
and broader workforce planning, performance and reward to a range
of clients in the private and public sectors.
My evidence draws on my involvement in public sector
reward over more than two decades.
EVIDENCE TO
THE COMMITTEE
1. The first part of this evidence is a
brief response to each of the Committee's questions. This is followed
by observations about possible ways forward for determining and
managing executive reward in the public sector.
RESPONSE TO
THE COMMITTEE'S
QUESTIONS
Are the right arrangements in place for setting
and monitoring pay and other benefits for top posts in the public
sector?
2. No. Executive reward is set and monitored
through different mechanisms—pay review body, remuneration
committees (with and without external membership), management
process and political decision—there is no coherent approach
to or common set of principles for executive pay in the public
sector. There is public and political disquiet about executive
reward in the public sector. There has not been a debate about
the appropriate arrangements for rewarding senior public servants.
(a) Are they fair?
3. If "fair" implies reasonable and
appropriately consistent, no.
(b) Are they transparent?
4. The level of transparency in the public sector
varies across the sector; it would be helpful if there was more
consistency broadly in line with that adopted in other parts of
the economy.
(c) Do they produce the right results?
5. No. 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.
(d) Do they provide value for money?
6. It is unclear. The cost of employing public
sector talent is low compared with the private sector. That low
cost may result in less competent talent being available to provide
leadership of service delivery for and on behalf of citizens and
to ensure value for money for the taxpayer; evidence on the calibre
of public sector executive talent is unclear.
(e) Do they inspire public and political
confidence?
7. No. The continued debate suggests that more
needs to be done to inspire confidence. There has not been an
informed public or political debate about executive reward (or
reward for the workforce generally) in the public sector; the
Committee's inquiry may provide the basis for building confidence
in future arrangements.
Does there need to be consistency regarding these
arrangements between different parts of the public sector?
8. The degree of consistency depends to a large
extent on the public sector's approach to the acquisition, development,
management and retention of the talent.
9. Part of a talent strategy for public sector
organisations should be the internal development of senior talent,
which would be consistent with best practice in other large organisations.
At the same time, it is important for public sector organisations
to have access to leading practices, experience from other parts
of the service delivery system, innovation and the stimulus of
alternative thinking. This implies part of a talent strategy should
be the acquisition of proven talent from other parts of the public
and private sectors.
10. 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.
11. Looking forward, it is reasonable to
anticipate greater inter-change across the public sector. This
suggests that there will need to be more consistency between different
parts of the public sector than today. However, consistency should
take the form of principles leaving scope for decisions to reflect
local and individual circumstances.
Does there need to be comparability of pay between
top posts in the public sector and equivalent posts in the private
sector?
12. Comparability is broader than just pay
levels. It covers three broad elements of reward:
— Level—the amount of reward available.
Although actual reward levels for
senior civil servants are significantly lower than for comparable
roles in the private sector, there is flexibility in the pay structures
to offer external candidates reward at more competitive levels,
though still below what they earned in the private sector. Most
external candidates from the private sector have taken a reduction
in pay because they also place value on the professional challenges
and public sector ethos.
However, use of flexibilities to facilitate
recruitment is causing problematic internal relativities between
external candidates and internal appointments; there is, in effect,
a two tier workforce amongst senior civil servants and this situation
is unsustainable in the near to medium term.
— Structure—the balance of fixed
and variable reward reflecting performance delivered or not, in
the short and longer terms.
Variable performance related pay in
the public sector is limited and is significantly lower than both
in the private sector and what would be effective recognition
for performance delivered. Public sector variable pay should not
be as geared as for the private sector, but the risks and rewards
of performance accountability should be higher than at present.
An issue that confuses the debate
about performance related pay is the term "bonus": it
used pejoratively by commentators to imply additional reward.
It would be helpful to use language more clearly to mean variable
or conditional pay that can be lower or higher depending on the
performance delivered.
— Scope—reward is a much broader
concept than just pay.
Some parts of the public sector manage
total reward (as do many private sector organisations), which
covers pay; benefits including pension; career development and
management; and, work life factors. In the debate about executive
pay, these other factors can be overlooked—see question
16 below.
(a) If so, how should equivalent posts
in the private sector be identified?
13. The focus should be on relevant organisations
and functional roles in those organisations. But it is important
not to create an expectation of like for like pay determination.
Comparability should be one input in determining pay alongside
other factors that enable the public sector to attract and retain
the talent it needs, and that take into account affordability.
Is there evidence of executive wage inflation
caused by public sector organisations competing with one another
for candidates?
14. Anecdotally, yes. The market most often mentioned
is for local authority chief executives and chief officers in
which local authorities compete with each other to recruit and
retain successful talent. Base pay 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.
What role should consultancies play in the determination
of pay for top public sector posts?
15. Although there are individual exceptions,
the overall competence of reward professionals in the public sector
is low; this impacts the effectiveness of reward strategies and
pay management. Consultancies play a valuable role providing reward
management advice and developing reward management capabilities
within the public sector.
Is the balance right between executive pay and
other benefits? eg bonus, pension
16. No. There are three areas where a better
balance can be struck between the different elements of reward.
A better balance should result in more cost-effective reward arrangements
measured by employment costs, performance and appropriateness
of executive talent. These areas are:
— Balance between base salary and variable
pay
There is limited use of performance
related variable pay (paid as non-consolidated, one-off payments)
across the public sector. The Civil Service uses variable pay
more widely than other parts of the public sector with a budget
(or "pot") of 8.5% of base salaries. Although it would
not be appropriate to adopt generally the level of variable pay
in the private sector for senior executives, there is scope to
increase variable pay budgets to 15 or 20% of base salaries: this
would give greater emphasis to performance without losing the
public service ethos,
— Balance between pay (base and variable
pay) and benefits
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.
Consideration should be given to moving
away from defined benefit pension provision (especially linked
to final salary) towards some form of base line pension provision
alongside more flexible savings programmes in which the executive
can choose to take part depending on their judgment of the level
of financial planning they need to make. Some parts of the public
sector are beginning to provide a range of benefits within which
the individual can make choices that better meet their specific
needs; this flexibility could make the reward package more attractive
to the individual at no extra cost to the employer.
— Balance between tangible reward (pay
and benefits) and intangible reward (career and work life)—a
total reward approach
There are good examples of how the
public sector makes use of intangible rewards that are attractive
to individuals and normally inexpensive to the employer to offer.
More can be done actively to manage or optimise the balance between
these elements and communicate their value to potential recruits
and employees alike.
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?
17. Pay level is a reward to the individual
for undertaking a role; it does not differentiate between different
levels of delivered performance and has little direct impact on
the individual's performance.
18. Pay level can impact recruitment and retention
of talent; the further below the market, the more difficult it
is to recruit (and to a lesser extent retain) good talent. There
is little hard evidence that the public sector can or can not
recruit and retain the talent it needs. The evidence that does
exist suggests the public sector has some talent challenges, for
example:
— leadership and people management—see
civil service capability review findings; and
— small fields of suitable candidates for
externally advertised senior vacancies feedback from recruitment
agencies.
(a) What impact does 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?
19. Weak leadership, professional expertise
and delivery experience adversely impact the effectiveness of
senior management and thereby the performance of organisations
they lead. At a time when public expenditure, service delivery
expectations and value for money are all under growing pressure,
the need for effective talent is greater than ever.
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?
20. Adopting the Prime Minister's salary would
provide an artificial, absolute limit on salaries that does not
reflect labour market circumstances, and therefore could impact
the public sector's ability to recruit and retain good talent.
21. An alternative approach suggested in the
Government's evidence in 2005 for the Senior Civil Service, to
the Senior Salaries Review Body (SSRB) was to link pay levels
to a specific percentage of the market median.
Can England and the United Kingdom learn from
the experience of other countries or the devolved governments
in this area?
22. Practice in other administrations could
provide valuable insights about reward policy and governance.
However, public and political confidence, as well as that of public
sector employees, depends on full debate about the optimal approach
to executive reward in the public sector. The inquiry by the Committee
is therefore to be welcomed.
SOME OBSERVATIONS
ABOUT THE
WAY FORWARD
23. Acquisition, development, management
and retention of talent, at any level, but especially for executives,
takes time and needs a sustainable reward strategy and governance
arrangements. The features of these arrangements should include
the following.
Reward governance
(a) The public sector is not one sector. Different
parts of the public sector compete for executive talent in different
markets. For example, government owned companies typically compete
with the private sector for business leaders with proven track
record; the civil service has grown about rds of its executive
talent from within and recruited externally from the public and
private sectors.
(b) Public sector reward should be guided by
a common set of principles within which different parts of the
public sector develop and manage reward specific arrangements.
(c) An independent review body should advise
on the reward principles and provide guidance to national and
local government, as appropriate, for the different parts of the
public sector.
(d) 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, to each organisation.
(e) Executive reward should be published
in annual reports by analogy with requirements for public companies.
Reward policy
(f) Executive reward levels (and for all
employees too) should be set sufficiently competitive to attract
and retain good talent while taking into account the attractiveness
of the intrinsic features of making a contribution in the public
sector, and the valuable experience that can be gained in the
public sector.
(g) All elements of reward should be managed
as a whole—a total reward approach and delivered in ways
that maximise individual choice to tailor the elements of the
reward deal that work best for them.
(h) Executive reward should be linked to
performance of the individual and the organisation in the short
and longer terms, and should be rewarded through variable pay
in which there is both risk and opportunity.
(i) Executive pension provision should be
reformed to reflect emerging market practice and affordability
through defined contribution arrangements at least for new entrants
and possibly for future service.
(j) Executive benefit provision should be
extended in scope to include benefits more typically found outside
the public sector and employee savings vehicles to facilitate
financial planning alongside the new pension arrangements.
(k) Executive reward should be affordable
in public expenditure terms and should take account of public
sector pay policy.
May 2009
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