Interim Report of the Fair Pay Review

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.

As this interim report details, there are signs that in parts of the public sector that have more autonomy - such as universities, foundation trusts and arms length bodies in general - there are significant upward pressures on senior pay and, before the pay freeze, some increasingly eye-catching settlements. Some of the arms race character of top private sector pay determination is also showing signs of reproducing itself in the public sector. On the occasions when the public sector does recruit from the private sector it has to pay significantly more for staff, creating knock-on inflationary pressures. 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. 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 public sector walks a fine line. It must create value for citizens by attracting and retaining talented individuals - otherwise it will become a second class sector of the economy. But equally it has to be vigilant about ensuring value for money. I believe that the fair pay principles articulated in this Review offer a way of walking that fine line - and assuring the public that their public servants are fairly paid, and that if there are examples of high pay they are within clearly understood boundaries.

The public sector should be cautious about simply adopting ‘best practice’ from the private sector, as private sector pay practices and corporate governance have not delivered proportionality in pay. On the contrary, listed companies have seen something close to a revolution in executive remuneration in recent decades. So, whilst the public sector needs better governance and transparency, this alone will not be enough. A comprehensive framework for fairness would also include disclosure requirements based on a pay multiple; better use of performance pay; and a renewed emphasis on ensuring labour markets for executives are properly competitive.

Key issues of definition for the pay multiple need to be resolved including the elements of reward included within the multiple, and whether 20:1 is appropriate for all organisations. Organisations would be able to exceed the multiple in exceptional cases but would have to explain their justifications for doing so.

There is also a broader case for private sector organisations to follow the public sector example and at the very least track and report on pay dispersion from year to year in a fully transparent manner. This would allow shareholders and wider stakeholders to monitor pay dispersion, and when it increases, to hold management to account for achieving performance.

Notes for editors

Will Hutton was commissioned by the Prime Minister and the Chancellor in May2010 to lead a review of fair pay in the public sector. He has been asked to make recommendations by March 2011 on promoting pay fairness by tackling disparities between the lowest and the highest paid in public sector organisations.

Press enquiries to Nasreen Memon at The Work Foundation on 020 7976 3507. Other enquiries can be addressed to fair.pay.review@hmtreasury.gsi.gov.uk

Key facts

• Over the past decade the top one per cent of earners have seen their incomes grow much faster than other earners, even relatively high earners. In 2009, the top one per cent of earners included anyone earning £117,523 or more.
• There are around 20,000 public workers earning over £117,523. Some 4,000 of these are managers (most of the rest are NHS medical professionals).
• Average salaries for executives in the following sectors 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. But there are individuals in each sector who considerably more than average.
• Amongst public arm’s length bodies there are a small number of individuals paid over £300,000: the heads of the Olympic Delivery Authority, Transport for London, Nuclear Decomissioning Authority, OFCOM.
• 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 cent per year. By comparison, pay for FTSE 350 executives has increased at an average of over 11 per cent per year, whilst median wages have increased at an average of 3 per cent per year. Pay for FTSE 100 chief executives was 2.5 times what it was in 1998.
• The average pay ratio between the lead executive of most public sector organisations and the lowest paid member of staff is below 12:1. By comparison, pay for median FTSE 100 CEO executives is 88 times the UK median wage.