Senior Management Reward
Implications of the Hutton Fair Pay Review
Stephen Bevan
Director
The Work Foundation
Honorary Professor
Lancaster University
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A Growing Mood for Fairness?
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Crisis of Trust In Our Institutions?
• Issues of business purpose and leadership,
and of morality, transparency and trust:
– The Banking System
– The Catholic Church
– BP – Gulf of Mexico
– Political Institutions
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Public Mood for Transparency?
• MP’s expenses
• Health records
• Food labelling
• Wikileaks
• All items of Local Authority expenditure over £500
• All public servants paid more than the PM
• Shareholder ‘revolts’ over Executive Rewards
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Hutton Fair Pay Review – Terms of Reference
This review, which will also help to shape broader social norms in
relation to pay fairness, should comprise:
•
Robust, evidence based analysis of the scale of the problem
•
Recommendations on how to introduce a public sector pay
multiple that would mean that no public sector manager can
earn over 20 times more than the lowest paid person in their
organisation.
As part of this the review will need to consider:
•
Over what timescale a cap could be applied;
•
How a cap would operate in areas outside direct Ministerial
control
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Fairness in Reward
“Fairness is about both outcomes and
processes. Outcomes must be proportional to
effort, especially discretionary effort that has
plainly made a difference to the enterprise.
Salaries, wages and bonuses must reflect
due desert.”
Will Hutton, ‘Are We Heading for a Fairer Workplace?’, 2010
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Who Most Deserves to be Rich?
Alan Sugar (businessman and TV personality) 37
JK Rowling (author of Harry Potter)
26
Lewis Hamilton (formula 1 racing driver)
7
Duke of Westminster (property owner)
2
Roman Abramovich (Russian businessman)
1
Jodie Marsh (glamour model and celebrity)
0
None of them
21
Source: YouGov/Fabian Poll, 2010
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‘Fairness’ – Key Concepts
• Justice (balance; procedural; distributive)
• Meritocracy
• Due desert for discretionary effort
(“I eat what I kill”)
• Proportionality
• Equity?
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Pay Dispersion in the Public Sector
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Annual average growth rates for the top management
positions and the bottom of the pay spine – 2001-08
7.00%
6.00%
5.00%
4.00%
Bottom Top
3.00%
2.00%
1.00%
0.00%
Civil Service
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Military (Top of 4* General Pay Band)
Further Education
Higher Education
Local Government
Hospital Trusts
Real median salaries: Top public sector
managers 1999-2009 (2009 prices)
£250,000
£200,000
£150,000
Permanent Secretaries
4* Generals (top of band)
NHS Hospital Chief Executives
Local Government Chief Executives
Further Education Principals
£100,000
University Vice Chancellors
£50,000
£0
2000
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2001
2002
2003
2004
2005
2006
2007
2008
2009
Estimated number of managers earning over
£150,000 by workforce
400
350
300
250
200
150
100
50
0
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Fixed Pay Ratios
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John Lewis Partnership – Pay Ratio
• Constitution of the Partnership defined the need for
both a minimum and a maximum wage in 1900
• The maximum wage was then set as whatever was
lower of these two calculations: 25 times the wage of
a London selling assistant with four children, or
£5000 a year, both after tax (7.5%)
• Today, the formula has shifted slightly and is now
expressed as 25 times the average basic pay of nonmanagement partners before tax
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Can Ratios in the Public Sector Work?
• To what problem are pay ratios the solution?
• Controlling dispersion?
• Improving transparency, accountability, engagement
& performance?
• Undermined by expanding autonomy over pay?
• Do ratios become ‘target’ rates?
• Susceptibility to ‘gaming’?
• Attracting key talent?
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Fair Pay Review Rejected a 20:1 Ratio
•
A single limit on pay dispersion would however be unfair, hitting some
organisations more than others
•
It could create perverse incentives and even become a target for
executives earning less
•
At present, a 20 to 1 maximum multiple would impact as few as 70
senior managers
•
Organisations delivering public services should track, publish and
explain their pay multiples over time
•
The most appropriate metric for pay dispersion is the multiple of chief
executive to median earnings
•
The Senior Salaries Review Body to publish annual Fair Pay Reports,
setting out pay multiples across public services, highlighting year-onyear changes and identifying organisations that fail to produce specific
and verifiable explanations for their multiples and for any changes
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PM’s Salary as Benchmark?
• On the face of it, the PM’s £142,500 salary seems a
reasonable ‘benchmark’
• Two major flaws:
i
Not accurate. PM salary is £198,660 (Mr Cameron chose to
take the lower figure) and total PM ‘package’ – including
living arrangements and allowances is £581,651
ii The PM’s salary has no relation to labour markets. There is
not a shortage of applicants and no job specification. PM pay
is not objectively linked to the value of the job, nor to the
need to recruit and retain individuals.
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Other Recommendations
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PRP, ‘Earn Back’ & Team Rewards
•
An outright rejection of PRP implies that there should be no financial
reward to differentiate the good from the poor performer
•
The public demands consequences for failure as well as rewards for
success
•
Should be a better balance between rewards and penalties in
performance pay schemes.
•
PRP should include an element of ‘earn-back’ pay
•
Executives required to meet pre-agreed performance objectives in
order to earn back an element of their basic pay that had been placed
at risk. Only if objectives were met would executives receive their full
basic pay, and only if objectives are clearly exceeded can additional
awards be made
•
It should be possible to design team-based incentives that reconcile the
importance of due desert with the reality that outcomes are collectively
produced by the whole of an organisation’s workforce
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Attraction of Top Talent
• Concern about process of top appointments
• Broadening of talent ‘pool’
• Cross-functional career paths
• Collaboration between Graduate schemes
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Pay Code
• To be adopted by all organisations delivering
public services on a ‘comply or explain’ basis
• Provisions on:
– proportionality in executive pay
– the use of variable pay
– enhanced disclosure of executive pay
• Independent pay-determination processes
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Questions
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Questions
• Is there an appetite or demand for fairness &
transparency over Senior pay in your
Borough? If so, where does it come from and
how are you responding?
• Do the recommendations of the Hutton
Review help or hinder?
• How should you respond to the ideas around
earn-back and team rewards?
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www.hm-treasury.gov.uk/indreview_willhutton_fairpay.htm
www.theworkfoundation.com
[email protected]
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