Will Hutton published the final report of his Independent Review into Fair Pay in the Public Sector, along with his recommendations to the government on 15 March 2011.[1]
He was commissioned by the Prime Minister and the Chancellor in June 2010, to make recommendations on promoting pay fairness in the public sector by tackling disparities between the lowest and the highest paid in public sector organisations.
“There needs to be a new settlement between the leaders of our public sector and the taxpayer – a recognition that good work deserves good rewards, but similarly bad work deserves penalising”, he told the Guardian.[2] He continued: “And to do all this there has to be a radically new framework in which senior pay is explained and justified. There needs to be a charter for transparency and embrace of performance, challenging the private sector to follow its lead. Indeed with so many British companies dependent on the taxpayer for so much of their business, especially in the fast-growing public service companies such as Serco, the government could insist it wants them to follow the same principles. Hence the proposals in my review of public sector pay.”
The main features of the new settlement that Will Hutton has proposed for senior public service pay are:
- Earn back pay: Senior public servants’ pay should be more strongly linked to their performance through a system of ‘earn back’ pay. Under this system, executives will have an element of their basic pay ‘at risk’ to be earned back each year through meeting pre-agreed objectives. This will allow pay to vary down as well as up with performance, and ensure that public services do not offer rewards for failure;
- Improved transparency: all public service executives’ full pay should be disclosed each year, along with an explanation of how it relates to job weight and performance;
- No arbitrary benchmarks: The government should not benchmark senior public servants’ pay against that of the Prime Minister, and should not impose a fixed limit on pay multiples (such as 20 to 1). The multiple of chief executive to workforce median pay should be published each year, and any changes explained;
- An informed debate on senior pay: Citizens need to understand public service executive pay in the context of job responsibilities. To support this informed debate, the Senior Salaries Review Body should publish fair pay reports each year, detailing pay multiples across public services;
- Fair pay across the economy: To make tracking pay multiples normal practice across the economy, Will Hutton recommends that public limited companies (PLCS) should also be required to track and publish their pay multiples – and the Government should consider commissioning annual fair pay reports on PLCs as well as public service organisations.
Chris Johnson, Head of Mercer Human Capital business responded to the report as follows:
“Will Hutton has done a good job at providing a basis for a long overdue political consensus around executive pay in the public sector. We would endorse his recommendations.”
“Delivering effective services to citizens – and within what taxpayers can and are willing to fund – depends, in part, on the quality of public sector senior executives. Fair and sustainable pay plays a key part in attracting, motivating and retaining the talent the public sector needs. Hutton’s proposals on performance and pay, on creating transparency and accountability, and for an enhanced role for the Senior Salaries Review Body, provide the basis for a new contract on senior pay.”
“We welcome Hutton’s move away from naïve concepts such as simple multiples of pay and using the Prime Minister’s salary as a relevant benchmark“
Mercer has highlighted four areas of the report that need more consideration.
Earn back pay: The report suggests that senior public servants’ pay should be more strongly linked to their performance through a system of ‘earn back’ pay. Under this system, executives will have an element of their basic pay ‘at risk’, to be earned back each year through meeting pre-agreed objectives. This will allow pay to vary down as well as up with performance, and ensure that public services do not offer rewards for failure.
Mark Hoble, Partner in Mercer’s human capital team and a reward specialist, commented, “This is about being more explicit about risk and reward and moving from a perception that bonuses are freebies. It needs to be clear to all that a bonus, or earn-back pay, is a reward for good performance and depends on meeting certain criteria. Contracts need to be watertight to reflect this. If they’re not, it could appear that an employee’s contractual pay is being reduced on performance issues, which could lead to legal challenges.”
No arbitrary benchmarks: The report suggests that the government should not benchmark senior public servants’ pay against that of the Prime Minister, and should not impose a fixed limit on pay multiples (such as 20 to 1). The multiple of chief executive to workforce median pay should be published each year, and any changes explained.
Mr Hoble said, “This is an important shift, but more will need to be done to make the proposed approach meaningful to the public.”
An informed debate on senior pay: The report highlights that citizens need to understand public service executive pay in the context of job responsibilities. To support this informed debate, the Senior Salaries Review Body should publish fair pay reports each year, detailing pay multiples across public services.
“This is a good idea and it is right that there is greater transparency. Taxpayers are the public sector shareholders and, as stakeholders, should have information on pay levels of those running the organisation – just as listed companies are required to disclose the pay of their senior management. However, there is a risk that displaying the pay details of a large part of the public sector may deter good people from working in the sector,” said Mr Hoble.
Fair pay across the economy: The report suggests making tracking pay multiples normal practice across the economy. Hutton recommends that Public Limited Companies (PLCS) should also be required to track and publish their pay multiples – and that the Government should consider commissioning annual fair pay reports on PLCs as well as public service organisations.
“Some would argue that asking private companies to publish their top pay to median ratio will be seen by many as irrelevant and a matter for shareholders,” said Mr Hoble. “However, you have to consider if policies like the minimum wage, or a review of banking pay in light of the financial crisis, would have been adopted if left entirely to market forces. This could be attractive to government given its more interventionist stance on social policy and fairness.”
[1] www.hm-treasury.gov.uk/indreview_willhutton_fairpay.htm
[2] www.hm-treasury.gov.uk/indreview_willhutton_fairpay.htm