There is a strong case for a maximum pay multiple to limit the pay of public sector executives, a government-commissioned review has found
Public bodies should have to “comply or explain” with a multiplier, such as the 20:1 originally suggested by the prime minister, according to the Hutton review of fair pay in the public sector.
The interim report shows that local government, health and education lead executives are some of the best paid in the public sector.
Report author Will Hutton, left, a former journalist and the executive vice chair of the Work Foundation, said that “there aren’t that many ‘fat cats’ in the public sector” but recommended the use of a pay multiple in order to reassure taxpayers and “demonstrate a commitment to fairness”.
His interim report sets out his intention to create a “fairness framework” in his final report, due in March, including improved transparency and governance, a pay multiple, better use of performance pay and a focus on the competitiveness of labour markets.
Mr Hutton said his conclusions could be applied to the private sector as well as the public sector.
Public sector variations
Data gathered by the review team shows that the more autonomous areas of the public sector such as local government, NHS and higher education have a higher pay ratio than those areas under closer ministerial control.
Mr Hutton said plans to increase public sector autonomy were likely to push pay up further.
“The boundaries between this new public sector we are developing and the private sector become more porous,” he said.
The pay ratio between county chief executives and their council’s lowest pay band was already 15:1 in 2008, he pointed out, second only to the heads of Russell Group universities. The pay ratio for NHS hospital trust chief executives was 12:1 and 10:1 for Whitehall permanent secretaries.
However, Mr Hutton told LGC the different ratios across the public sector were understandable.
“The complexity and weight of the shire counties are higher than other parts of government,” he said. “It is the argument of due desserts.”
He also pointed out that, in the private sector, FTSE 100 CEOs had a pay ratio of 88 times the median wage in 2009.
The fair pay review’s analysis shows that pay in local government, health, and education has been rising faster for top earners than bottom earners.
The average annual increase for local government chief executives between 2001 and 2008 was 5.2%, compared to just over 3.2% for the lowest pay band in local government.
In contrast, the same measure showed that the lowest paid in the civil service had a 4.2% average annual increase compared to 2.8% for permanent secretaries.
Figures relating to the median pay of top executives in different parts of the public sector shows university vice-chancellors, followed by LBC chief executives and shire chief executives, all above £170,000.
The median pay of MBC and unitary chief executives, however, is closer to £150,000 and is less than in the military and permanent secretaries.
Examining the market forces behind public sector executive pay, Mr Hutton identified the personal risk to individuals of failure and highlighted the case of Haringey LBC’s former director of children and young people’s services Sharon Shoesmith.
Public sector roles had also become increasingly complex in the last decade, he said, and quoted research from Hay which showed they were more complex than private sector executive roles.
“Pound for pound they are being paid much less for the job complexity,” he said.
In the case of local government, Mr Hutton added, tenures were usually of just four to five years and he referred to the Audit Commission’s report on the limited pool and called for better talent management.
When outsiders from the private sector were appointed he advised public bodies to be “hard headed” about remuneration deals and emphasised the need for pay to be related to performance.
Responding to the report, Mary Orton, honorary secretary of the Association of Local Chief Executives and chief executive of Waverley BC, insisted that a multiplier was not appropriate in the local government labour market where pay decisions were for individual councils to make.
“When central government is saying that localism is the best policy it seems to be to be perverse that they should be seeking to have a Treasury controlled formula”, Ms Orton, right, told Mr Hutton on the BBC’s Today programme.
Her own pay was 7.5 times higher than the lowest paid employee at Waverley, she said, and “you would be hard pressed to find any local authority chief executive who exceeds the 20 times multiplier”.
Although she accepted Mr Hutton’s suggestion that pay had been pushed up in recent years, as referred to in a 2008 report by the Audit Commission, she said the labour market had begun to correct itself.
“If you look at the most recent data the sector is self-regulating and pay is actually coming down,” she said.
Unison’s general secretary Dave Prentis said the real pay inequality was in the private sector, not the public sector, and warned that the government’s cuts would only worsen the situation by hitting the poorest hardest.
“The 20:1 pay ratio is a red herring, designed to grab headlines, but an empty gesture that won’t boost fairness,” he said. “The real top to bottom pay gap is in the private sector. Here the boardroom bosses award themselves massive pay rises, big bonuses and generous pension perks, while those at the bottom get paid a tiny fraction of their salaries and are frozen out of pension schemes.”
In their evidence to the fair pay review, Unison said top pay in some areas of the public sector were rising fast because senior managers had been taken out of national bargaining and weren’t affected by the government’s pay freeze.