Public sector pay systems are inflexible and linked to time served rather than performance. This has to change and the lead must come from chief executives, finance and HR directors
Every now and then, politicians say that something has to be done about public sector pay. In the 2010 Spending Review, the Chancellor announced a two-year freeze on pay increases; in practice, salaries carried on rising for the next three years. In June 2013 he announced that automatic incremental rises – the main reason the freeze didn’t work – would come to an end. But will the system really change?
One of the difficulties facing the government is its lack of direct control. It can decide what to do about the central civil service, but that only accounts for 8% of public sector employees.
The NHS, teachers and the army – together just over 50% of the public sector – are covered by review body recommendations, following submissions from all parties. Ministers can ignore a recommendation, but as recent media coverage of the NHS shows, the debate is accompanied by a fair amount of lobbying and public politics.
In the remaining 40% of the public sector, pay is negotiated by employers and unions. The government can state its case, but it cannot dictate.
Another difficulty, though, is the approach of directors and senior managers in the public sector. In recent Hay Group research, more than half of the senior leaders who responded said that the current pay systems do not promote the right behaviour among staff; yet the majority (64%) also said they were not expecting to make any changes before 2015. They know reform is needed, but are not prepared to take the lead.
Of course, public services are facing major cuts – more in the coming years than they have had to tackle so far – so senior figures may feel they have enough to do, without taking on pay reform as well. They will also be inclined to put this off: the teaching unions have already shown that pay and conditions are a striking matter.
In the same Hay Group survey, nine out of ten employees also feel their organisation’s pay arrangements need to change, but 87% would oppose a move away from annual pay increments, which lie at the core of the problem. And when morale is already low, what kind of leader would volunteer to make it worse by alienating staff?
However, a reality check is needed here. First, pay is commonly over 50% of total costs in public service organisations; in hospitals it is around two-thirds, and in police forces, people account for over 80% of total costs. If money has to be saved, it makes no sense to ignore the paybill.
Second, if pay systems remain the same, the only alternative if budget cuts have to be made is to fire people. When the recession hit the private sector in 2008-10, the number of redundancies was limited by the way pay operates – cuts in variable payments and negotiated reductions in fixed pay restricted the damage.
If the public sector doesn’t change, financial constraints will simply lead to more job losses, which seems neither practical nor responsible.
Third, to cope with the next round of spending cuts, many public sector bodies will have to re-examine who they are and how they operate. The most obvious example is local authorities, many of which will transform from service delivery organisations to commissioners and shapers who work with and through partners. It would be extraordinary if they were prepared to rethink everything they do – except how they pay people.
Public sector pay is inflexible and linked to time served rather than performance. It is ill matched to 2014, let alone to the needs of the future. But it will take more than another announcement from the Chancellor to change all that.
Public service leaders – particularly chief executives, finance and HR directors – will have to take the initiative and make it happen.
Peter Smith is director of public service reward practice at Hay Group
