Payment by committee

8 Apr 10
Public sector ‘fat cats’ are the latest target of attacks as the financial crisis continues. Could independent remuneration committees restore faith in senior staff pay? Duncan Brown reports
By Duncan Brown

8 April 2010

Public sector ‘fat cats’ are the latest target of attacks as the financial crisis continues. Could independent remuneration committees restore faith in senior staff pay? Duncan Brown reports

In tough economic times, it’s not a surprise that many people are critical of those perceived to be doing well. A great deal of attention is currently being paid to public sector spending, and particularly to senior level pay and pensions. The Taxpayers’ Alliance claims that more than 1,000 people in local government are paid over £100,000 and 12 more than £200,000.

Communities and Local Government ­Secretary John Denham has criticised this apparent pay free-for-all.

In light of this, all the main political parties have pledged to limit public sector pay growth. It’s not just bankers facing scrutiny. In March’s Budget, Chancellor Alistair Darling reiterated his December Pre-Budget Report commitment of a two-year 1% pay rise limit across the public sector and a cap on pension payments. In the same month, the prime minister announced pay freezes for senior staff across the public sector. And, apparently in reaction to press and public hostility, the pay levels for executive vacancies in some organisations – including Kent County Council and the Audit Commission – have been set below those of the previous job-holders.

Largely arising from the financial crisis, a number of governance reviews started last year, which included consideration of executive remuneration.

In the private sector, there has been no or little move to limit executive pay, nor halt the trend for performance-related bonuses. Instead, there are longer-term incentives and wider public disclosure of pay. This comes with strengthened governance and an enhanced role for remuneration committees, whose ambit in the banks will extend beyond board-level executives.

In December last year, the Commons public administration select committee called for independent remuneration committees to be set up across the public sector, in line with those required for quoted companies since the 1995 Greenbury ­Report. It wants similar requirements too on remuneration disclosure.

The committee also proposed extending the remit of the current Senior Salaries Review Body so that it would, in effect, ­ become a commission for top pay in the public sector.

Some publicly owned companies are leading the way. For instance, Royal Mail Group, Network Rail and parts of the civil service have already introduced remuneration committees in various guises to set the pay of senior executives. And there are pay bands for senior civil servants and NHS senior managers.

But are remuneration committees generally the answer? There are three main advantages in setting one up. First, simply establishing one goes some way towards improving perceptions of the pay-setting process. And this is important; senior executive remuneration needs not only to be set at levels that are appropriate and fair, but also be perceived as appropriate and fair.

As the handbook for chief executives in local government puts it: ‘It is essential for good governance that decisions on pay have been made in an open and accountable way… more than lip service must be paid to providing a verified process for recommending top salaries.’ Such committees are perceived globally as vital for improving corporate governance and a demonstrable way of bringing independence into the senior ­remuneration-setting process. 

Secondly, remuneration committees can bring professionalism and expertise in setting pay, giving employers access to a range of skills and knowledge that they do not typically have in-house. Committee members can be drawn from other parts of government, the private and third sectors, and from those who specialise in executive remuneration work.

Thirdly, it can be argued that successfully operating committees can be an ­effective defence against unwarranted interference from other bodies, particularly central government in the public sector’s case. For example, a number of committees in departments and agencies rejected a central government request to cancel or defer senior manager bonus payments in 2009. They believed that the local circumstances and performance simply did not justify this.

However, there are downsides too. ­Remuneration committees are far from perfect and do not solve all the issues and criticisms found at senior pay levels. Examples from other sectors highlight the potential problems.

First, it can be very easy for executive remuneration to become divorced from pay issues for the wider staff. This is particularly true when the internal human resources department has little dealing with the committee and it hires its own external pay consultants, as happens in parts of the private sector. The growth of remuneration committees has failed to slow both the general growth in pay differences and to reduce external criticism.

This can lead to problems in developing a reward strategy to suit an organisation’s particular needs and character. This is especially true if the committee becomes dominated by individuals with strong views on ‘right’ and ‘wrong’ ­remuneration approaches. ­Committee membership ­selection is therefore critical.

Another danger is conflict between the employer and the committee. Roles and responsibilities must be clearly defined in advance to avoid this. It could be argued that pay-setting is necessarily a more political process in the public sector and so a committee’s independence is always going to be limited. Achieving the right balance of relevant knowledge and expertise with the required independence in the membership is a challenge, which might only get worse with the likely growth in the numbers of committees and people required for them.

So remuneration committees are not a panacea. But if properly designed and operated they can help to improve both the quality and independence of senior pay setting.

They are also just one way of improving the process of setting senior pay across the public sector. Others include: greater clarity on reward and talent strategies; a clearer rationale for taking senior staff out of the pay structures for general staff (or even putting some of them back into those structures); a clearer definition of what is managed centrally and what is managed locally on senior pay and a central government that adheres consistently to these boundaries; and a clearer stance on performance pay and incentives.

Appropriately structured and operating remuneration committees could make an important contribution – in some cases they already are. But setting one up purely to ‘take the heat off’ risks only building more problems in the future.

And it is also important to note that a recent PricewaterhouseCoopers report found that chief executive salaries in local and central government were only around 50% of their private sector equivalents. So make sure you know what problem you are trying to solve before you jump at this solution.

Duncan Brown is director of reward services at the Institute for Employment Studies

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