George Osborne's promise of greater regional pay differentiation for public sector employees is based on some common myths about the way national and local pay levels are determined
Day by day the number of myths or misunderstandings about local pay determination in the private and public sectors seems to grow. In part this is because some of the economic theory behind many of the assertions is ignorant of actual practice and thus the development of rational arguments is made more difficult.
Myth number one was asserted in the Chancellor's 2011 Autumn Statement which said: ‘While private sector pay is set in accordance with local labour markets, public sector pay is usually set on a national basis.’ Here is a classic example of not comparing like with like. The fact is that most large, multi-site private sector companies have national pay structures. These organisations, among them retailers, banks or telecom companies are not dissimilar to large, multi-site public sector organisations that have national pay structures.
Myth number two is contained in the above quote about ‘private sector pay being set in accordance with local labour markets’. The impression is given that private sector pay is set by a myriad of individual-level decisions based on specific local labour market variations. In reality, large, multi-site private sector companies operate with up to 4 or 5 bands or zones within a national framework. Typically these bands or zones are based on the established pattern of inner London, outer-London, South East and large city allowances. Zonal systems, widespread in the retail sector, allow for a store to be moved to a higher paying zone if labour market conditions require this.
Myth number three is that there is significant regional pay variation outside of London and the South East. In reality there is much less than is imagined. There is much more similarity than difference. In practice, most of the retailers and banks that operate with zonal-type pay systems have national pay structures outside the South East that have worked well for them for some time, without seeking to differentiate between Newport, Newcastle or Nottingham.
Myth number four is that local labour market/cost-of-living factors have displaced skill level, qualification and job weight in setting pay in the private sector. Even in smaller private sector organisations, skills and qualifications will be key factors. And there is plenty of evidence that international engineering companies with bases in Gloucestershire and Derbyshire will use international salary data on skills and qualifications rather than local data for recruitment purposes.
Myth number five is that pay is determined at a local level in the private sector, creating the notion that local-level managers in large private sector companies have the freedom to vary pay without reference to head office. Most finance directors of large companies would say that budgets have to be set and procedures have to be followed for any variation to be sanctioned. And that variation would at most be about a local branch or store being moved from zone D to zone C.
Myth number six is that public sector pay is set by rigid national agreements, with no scope for flexible interpretation. Yet in many aspects of pay modernisation in the public sector in recent years local pay flexibility around national pay spines has been a key feature. Most large public sector bodies have inner London, outer London and South East allowances and in some cases they have London regional pay bands.
Myth number seven is that the experimentation is confined to recent changes within the Ministry of Justice. In fact a zonal pay system was introduced a number of years ago for school teachers in England and Wales initiated by the School Teachers’ Pay Review Body (STRB). The STRB wisely stopped short of allowing schools to move between zones as it expressed concerns about creating a labour market in teachers that might get out of control.
Myth number eight is that there is something intrinsically better about not having any national structures in place. But leading HR professionals in large companies with branches throughout the country would say national pay structures and national pay determination provide simplicity, avoid the costs of duplication, allow better pay bill control, create consistency and avoid poaching and leapfrogging.
Myth number nine is that across the private sector geography in some curious way has become a key determinant of pay levels, whereas in fact industrial sector is still a key factor. Take the car industry as an example, with different companies operating in East London, Merseyside, the West Midlands, Sunderland, Oxford, Derbyshire, North Wales and Swindon. There is a great deal of similarity in pay levels by skill grades across these companies. These car manufacturers benchmark pay among one another and against other successful manufacturing companies. Geographical pay differentiation within the UK is not on their radar, although global pay differentials may be a consideration.
Myth number ten is that the public sector should start varying pay without regard to any other factors, but change does not occur in a vacuum. Employers in the public sector have spent much of the past ten years trying to develop pay systems that would eradicate equal pay challenges. Paying people doing ‘like work’ at different rates of pay ‘for no good reason’ would re-open the gates to equal pay challenges and any number of challenges about unfair treatment. Even zonal pay systems can provoke arguments about unfairness over where the lines are drawn.
Alastair Hatchett is head of pay & HR services at Incomes Data Services. This post first appeared on its website