Will Hutton is not a simple bloke. Working with him on the expert group to the Fair Pay Review, whose final report was published yesterday, you realise his brain is enormous. The final report from the review on senior pay in the public sector, which he has led, rightly puts senior pay in its wider social and economic context. To address the issues of executive pay we have to ask ourselves what sort of society we want to live in and what sort of government we want to have.
The interim and now this final report brilliantly dissect the issues and highlight why top pay has pulled so spectacularly away from everyone else's, particularly in the private sector but also in the public. In a 130-page report bulging with facts, figures and a dozen recommendations, we learn that FTSE 100 chief executive pay has more than doubled over the last decade up to 138 times average earnings, with pay ratios between the highest and lowest earners across the public sector also increasing up to between eight and 15 times.
Simpler minds in the media may grasp the initial recommendation, that ‘the government should not cap executive pay across the public sector but require all public service orgnisations to publish their top to median pay ratios each year’ as a climb-down, a cop out, abandoning the original idea of a fixed 20:1 highest:lowest pay cap across all public sector employers. The report points out that such an arbitrary and uniform cap would, ironically, be ‘unfair, hitting some organisations harder than others’.
The report also defends the need for high quality public sector leaders to be paid appropriately and competitively, and points out that only £1 in every £100 earned by the top percentile of UK earners (paid over £290,000) is paid for by the public sector.
But in reality, the report presents a comprehensive framework to manage public sector pay in the future in a more informed, rational and controlled way, with significant implications for the private sector, if its recommendations are accepted in full by the government. It could radically change executive pay determination in a largely positive direction and should be required reading for all remuneration committee members and HR directors in all parts of the economy.
You and I may quibble at the practicality of some of the recommendations. Performance pay was always going to be the most contentious issue in this review, given its patchy record in the public sector and the lack of evidence on the link between organisation performance and executive pay in the private. Putting a proportion of senior public servant's pay genuinely at risk and needing to be ‘earned back’, in return for the opportunity to earn more in bonus through high performance, is a nice concept. But it ignores the natural tendency of executive bonuses in all parts of the economy to become in reality budgeted and expected fixed costs.
Employee representatives on remuneration committees may be a headline-grabber and putative Labour party policy. But it raises all sorts of practical issues of supply, selection and training.
But these are just that, quibbles. The principles set out in the recommended and detailed Fair Pay Code of practice, which all public sector organisations would need to adopt on a 'comply or explain basis', summarise the reports recommendations to address the three core issues and requirements of:
- fair and appropriate pay levels set through appropriate external and crucially, internal, comparisons of top with median earnings levels;
- fair pay processes, with genuinely independent and competent remuneration committees in all parts of the public sector that are independently assessed every three years, and the Senior Salaries Review Body’s role significantly expanded into becoming close to the sort of High Pay Commission that some have called for;
- improved transparency and accountability, with significantly enhanced executive pay public information, ‘moving from disclosure to explanation’ including mandatory pay ratio disclosure and the annual publication of fair pay reports.
The report also successfully transcends the narrow, often over-specialist world of executive remuneration, with recommendations to improve the supply of talent into senior positions in the pubic sector, and encouragement for organisation-wide gainsharing plans, which have an excellent research record.
The publication of internal pay ratios and fair pay reports should also be carried out in the private sector according to the report, and it recommends that this is enforced through financial reporting requirements and a revived Operating and Financial Review.
Fairness matters to all of us. It always has done but the issue has been brought to the fore by the recession and public sector and welfare cuts. If the review achieves its goal ‘to ensure that decisions on executive pay take account of the whole workforce context’, and in the context of organisation-specific reward strategies that are driven by the corporate goals and employee needs of each, unique organisation, rather than simply boiler-plating external practice and ratcheting up pay on that basis, then Will will have genuinely succeeded.
Duncan Brown is principal at Aon Hewitt
