Limit executive remuneration to maximum pay multiple, says Fair Pay Review

There is a strong case for limiting the pay of senior executives in the public sector to a maximum multiple of the amount earned by the lowest paid in their organisation, the Fair Pay Review has recommended in an interim report.

The report suggested that organisations could be required to “comply or explain”, where they have to justify why they have not stayed within the multiple.

Research for the report revealed that over the past decade the top 1% of public sector earners have seen their incomes grow much faster than other earners, even relatively high earners. In 2009, the top 1% – who numbered 20,000 – included anyone earning £117,523 or more.

The average salaries for executives in key parts of the public sector in 2008 were: £200,800 for Heads of Universities; £150,000 for NHS Hospital Trust Chief Executives;  £117,500 for Local Authority Chief Executives; £110,700 for Principals at further education colleges; £170,800 for 4* Generals in the Armed Forces; and £160,000 for Permanent Secretaries. However, the report revealed that some individuals in each sector earn considerably more than the average.

A small number of individuals at public arm’s length bodies were paid more than £300,000, including the heads of the Olympic Delivery Authority, Transport for London, Nuclear Decommissioning Authority, and OFCOM.

The interim report found that in the NHS, local government and further and higher education, median top salaries have been growing at faster rates than entry level salaries – at around 5 to 6% per year. However, pay for FTSE 350 chief executives has increased at an average of over 11% per year.

The report warned the public sector to be cautious about adopting ‘best practice’ from the private sector. It said improved governance in the public sector – as recommended by the Senior Salaries Review Body – was only one element of the solution.

A comprehensive framework for fairness for senior remuneration would also include:

• Disclosure requirements on a pay multiple. Organisations would be allowed to exceed the multiple in exceptional cases, but they would have to explain the justification for doing so. However, the Review acknowledged that key issues of definition of the pay multiple are still to be resolved, including the elements of reward and whether 20:1 is appropriate for all organisations.
• Better use of performance pay
• A renewed emphasis on ensuring labour markets for executives are properly competitive.

There is also a broader case for the private sector organisations to follow this example, it said, and “at the very least” report on pay dispersion.

Will Hutton, who was appointed by the Prime Minister to lead the Review, said: “When the economy grew there were fewer concerns about fairness in general and fair pay in particular. Now the economy is under pressure, how fairly society distributes its benefits and burdens has suddenly become more pressing.

“The basic concept of tracking pay dispersion within boundaries is where concern with fair pay must lead. There is a strong case for public sector organisations having to comply with, or explain why they do not comply with, a maximum pay multiple, such as 20:1. This would demonstrate fairness by reassuring public opinion, address a problem of collective action across remuneration committees, and benefit organisations’ productivity.”

Hutton warned of significant upward pressures on senior pay in parts of the public sector that have more autonomy – such as universities, foundation trusts and arms length bodies in general.

He also said that “some of the arms race character of top private sector pay determination is also showing signs of reproducing itself in the public sector”. Where the public sector has to recruit from the private sector it has to pay significantly more for staff, creating knock-on inflationary pressures, Hutton added.

“Moreover the range of top pay deals across the public sector has little coherence or relationship to the public’s priorities in generating genuine public value,” the Review chairman said. “Without clear principles there is every prospect of the rise and potentially irrational range in senior pay settlements continuing – which will accentuate already growing concerns about pay fairness.”

The Fair Pay Review will make detailed recommendations in its final report, which will be published in March 2011.