Memorandum from Local Government Association
and Local Government Employers
INTRODUCTION
The Local Government Association (LGA) represents
over 400 local authorities across England and Wales, including
all twelve councils which currently have directly-elected mayors.
In its role the LGA aims to put councils at the heart of the drive
to improve public services and to work with government to ensure
that the policy, legislative and financial context in which they
operate, supports that objective.
SUMMARY
1. We would like to thank the Committee
for this opportunity to present some considered thoughts on the
subject of executive pay in the public sector. Like all bodies
with some responsibility for executive remuneration, we recognise
that there is real political and public concern about both the
level of top remuneration and growth in packages and also about
how well the mechanisms for setting top pay are operating. For
us, this concern predates the current economic downturn but has
undoubtedly been exacerbated by it.
2. Our evidence is written from the perspective
of our role in agreeing annual basic pay increases and some core
terms and conditions for Chief Executives and Chief Officers but
we hope that our observations will help in developing a more general
picture.
3. Our key observations are as follows:
— Local Government operates a system in
which the main decisions on executive remuneration are taken by
individual councils as employers. This is very important in ensuring
that local politicians can be held to account for the decisions
they make. It also enables councils to operate flexibly in the
markets they need to recruit in.
— This approach has served the local government
sector very well in recruiting leadership teams capable of running
very complex organisations. No other parts of the public sector
and few if any parts of the private sector operate such a wide
range of critical services with such large budgets as local authorities.
No hospital chief executive, for example has to manage education,
public safety, housing and highways services on top of social
care. Added to this is the unique political environment of being
responsible to local elected members as well as having to interact
with the national government.
— The salaries and rewards agreed by local
determination sometimes reflect a better economic climate and
local priorities in recruitment that may no longer be sustainable
in the current economic downturn. Councils need talented people
in top management positions; however they must take steps to be
more accountable in setting top pay and rewards and balance this
with the need, in a tight financial situation, for all salaries
to be demonstrably reasonable.
— We have long recognised that the perception
of the system and its apparent fairness is very important and
that councils must take decisions about pay for senior executives
in an accountable way. The LGA Group has recommended that councils
should establish independent remuneration committees and this
advice is now set out in the national terms and conditions for
chief executives.
— We will shortly be issuing guidance to
the sector advising councils to review their own remuneration
strategies and setting out some recommendations for strengthening
the use of remuneration committees and on how councils can manage
growth in top pay more rigorously.
— We believe that councils must be completely
open and transparent about the full range of pay and benefits
in top reward packages. We therefore support the Government's
decision to require public disclosure of remuneration information
in local government in a way that is equivalent to the current
requirements in the Civil Service. We look forward to the forthcoming
consultation on detailed proposals.
— We are sure that it is appropriate for
different parts of the public sector to develop remuneration strategies
that suit their very different responsibilities and methods of
operation, though of course there are some important common principles
about accountability.
— We do think it is important to encourage
the shared development of leaders across the public sector to
promote a partnership approach, so common training and enhanced
chances to work across sectors will be important developments.
THE ROLE
AND IMPACT
OF CHIEF
EXECUTIVES IN
LOCAL GOVERNMENT
4. Local authority Chief Executives have
always had complex roles and the level of complexity is increasing.
They have overall responsibility for budgets of £370 million
on average and well over £1 billion in a number of cases.
They are responsible for nearly 5,500 staff on average—over
48,000 in the biggest council. They oversee dozens of statutory
services including the whole vital range of services for children,
public protection, highways and so on. It is estimated that upper
tier local authorities have over 700 different occupations. In
recent years, Chief Executives have had to lead the development
of new responsibilities working in partnership with the Health
Service, Police and others on community issues. Councils also
have wide and growing responsibilities for economic and community
development, which is central to national recovery. One example
of new responsibilities that will be devolved next year is responsibility
for brokering training and skills development for all 14-19 year
olds. All this has to happen in the context of democratic politics.
5. The impact that a strong Chief Executive and
management team can have in practice is considerable. A council
that is well managed both politically and managerially can have
a strong impact on local communities. The whole team is responsible
for running some very large business units.
6. An exhaustive listing of responsibilities
is not possible here but the point is well made that the top leadership
team overseeing this range of core responsibilities requires exceptional
capabilities. The reward package has to reflect this need as well
as the need to provide demonstrable value in the use of taxpayers'
money. All these observations apply proportionately to Chief Officers,
such as Directors of Children's Services, as well.
REWARD STRUCTURE
FOR TOP
EXECUTIVES IN
LOCAL GOVERNMENT
7. The main responsibility for setting pay
and rewards for Chief Executives—and indeed all staff—in
local government lies with individual councils as employers. There
is a voluntary arrangement whereby all but around 10% of councils
take part in national negotiations through Joint Councils involving
the recognised Trade Unions. The JNC is a collective bargaining
mechanism that agrees a national annual basic pay increase and
some other core terms and conditions—particularly the disciplinary
process for Chief Executives.
8. The individual salary level to which any national
increase is applied is set entirely at local level, based on an
assessment of the size of the job and relevant market comparators.
The way in which pay is adjusted each year is also a matter for
local discretion. In practise, around 64% of Chief Executives
are paid on an incremental pay range and 36% have a "spot
salary", which is reassessed periodically.
9. On top of this, some councils offer various
additional payments and, to a lesser extent, performance related
pay. Additional payments include things like regional allowances,
long-service supplements, fees for administering regional bodies
etc. Around 49% of Chief Executives receive additional payments
and 6% are known to receive some performance related pay.
10. All the various elements of remuneration
packages produced an average actual payment of £128,922 (not
including pension entitlements) to Chief Executives according
to the latest LGE survey in 2008. The survey found that the overall
average (mean) annual basic salary for chief executives excluding
additions was £124,784. The corresponding figure was £90,965
for 1st tier officers, £69,528 for 2nd tier officers, £58,575
for 3rd tier officers and £53,877 for other executive officers.
11. The evidence from last year's report
on chief executive pay by the Audit Commission, "Tougher
at the top?" was that basic salary levels for single tier
and county council chief executives increased by 34% between 2003-04
and 2007-08, whereas the total pay of private sector chief executives
increased by 78% from 2002-03 to 2006-07. Part of the increase
in the pay of council chief executives was related to growing
turnover, which increased from 11% in 1998 to 17% in 2007 for
single tier and county councils. The Audit Commission's research
observed an emerging consensus that effective political and managerial
leadership are fundamental in creating high performing local authorities,
and a perception that the appointment of an existing chief executive
with a good track record is the best way to improve performance.
12. The range of individual salaries is
quite wide though salaries at the upper end are the exception
to the rule. In our most recent survey the distribution was as
follows:
13. The salary range is not out of line
with the rest of the public sector, however, in common with the
public sector as a whole, we need to ensure that further growth
in reward packages is carefully managed in order to ensure that
executive reward reflects current economic circumstances.
THE BALANCE
OF REWARD
PACKAGES
14. Additional financial benefits and bonuses
are not as significant a component of pay as they are in the private
sector. However, work is being done to establish a full picture
of additional payments, so that recommendations can be developed
about how best to control them.
15. The pension scheme is an important additional
part of the overall reward package. It is a funded scheme with
contributions from individual employees, as well as from employers.
Employer contributions can add around 20% on average to individual
reward packages. The pension scheme has recently been reformed
to introduce banded payments so that higher earners pay more,
with rule changes to make the scheme more affordable. This will
need to be kept under review, to ensure that the scheme continues
to take account of longer-term economic and demographic factors.
ENSURING PUBLIC
ACCOUNTABILITY
16. We believe that local government needs
to balance the benefits of local decision-making with complete
clarity and openness about the reward packages given to top executives.
17. Councils take their fiduciary duty in accounting
for top executive remuneration very seriously. There is already
a high level of public disclosure of salary levels and we support
government moves to extend these. Councils also produce extensive
audit material according to the requirements of the Audit Commission
and CIPFA. The sector is also unique in its signed commitment
to completing equal pay audits across the workforce.
18. LGE and LGA do believe, however, that
local government must take careful note of concern about top salary
levels. We intend to recommend that councils should review their
local remuneration strategies, improve accountability through
appointment of remuneration committees with members from outside
the council and examine ways to demonstrate that annual growth
in pay is reasonable and justified.
19. The LGA Group has advised councils to
set up independent remuneration committees to oversee the process
of setting top pay and reward packages. Advice on setting up committees—preferably
with representatives from outside the council—is contained
in the national terms and conditions for chief executives. Such
committees can provide powerful oversight of the mechanisms for
setting pay and the advice and information taken into account.
We have now expanded our advice to recommend that councils 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.
BENCHMARKING ACROSS
SECTORS
20. The question of providing an appropriate
benchmark for salaries across the public sector has been raised.
We think it is important to understand what this would entail.
We have already outlined the particular specialist roles of top
executives in local government. We feel sure that other sectors
should highlight their own specialist roles as well. If any attempt
is to be made to develop good comparable benchmark salaries for
the public sector, the exercise will need to involve the entire
public sector and take account of detailed differences in job
roles beyond simple job titles, in order to create an accurate
analysis.
21. We believe that it is increasingly important
to develop a cadre of multiskilled leaders who can work increasingly
across and between different parts of the public sector delivering
services in partnership. We believe that it is important to enhance
the scope for common development and learning as well as for sharing
experience via secondment from government departments to local
authorities.
22. 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.
INTERNATIONAL COMPARISONS
23. We have not made a close study of systems
in other countries but we do believe that it is valuable to note
that in Scotland, where a more highly centralized form of pay
setting for Chief Executives has been retained, there is some
intense discussions about growing problems. In particular there
is some disagreement about finding appropriate benchmark comparators
for Chief Executives because the old comparators of civil servants
and head-teachers are regarded as inadequate.
24. Also, we are aware that some years ago the
Republic of Ireland attempted to conduct a wide-scale salary benchmarking
exercise across the whole public sector, which resulted in significant
anomalies and disagreements.
25. Our conclusion is that the best approach
is for individual sectors to have flexibility to operate within
their own requirements and relevant markets, although this flexibility
must be used responsibly and accountably.
April 2009
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