Hay Group: Align public benefits with private sector

27 October 2014 Consultancy.uk

Top civil servants have the lowest-paid leadership jobs in the public sector – until that changes, we won’t attract the best talent, says Peter Smith from Hay Group.

The chancellor of the exchequer is a well-educated man and may well be familiar with E M Forster’s novel, Howards End, and its insistent message “only connect”. Yet George Osborne fails to link what he wants to do with the means to achieve it. He wants capable and expert people to run the public sector but isn’t prepared to pay what it takes to get them.

The gap between public and private sector pay has been growing, particularly at senior levels, with the corporate sector offering greater rewards at middle manager level and above. In the past four years this disparity has increased, as pay rises have been capped in the public sector while reaching 3% – 4% per year in the private sector.

The difference is about more than the package value, however – it is about philosophy. Companies are concerned to reward performance and keep pay flexible. The Financial Reporting Council’s update to the UK corporate governance code increased emphasis on giving senior executives a stake in the long-term success of the business.

UK Government

In contrast, the public sector concentrates on fixed pay, is afraid of getting much involved in performance pay and, if it offers bonuses, insists they will be annual and often individual. There is no relationship between the long-term improvement and performance of public service organisations and what their senior leaders get paid.

Demands on senior civil servants are considerable
Perhaps the biggest concern is with the senior civil service, which has to advise ministers and enable the country to run effectively. These are the lowest-paid leadership jobs in the public sector. The civil service equivalent of an executive director in a major teaching hospital gets only about two-thirds of the salary of their NHS counterpart. Yet the demands are considerable and increasing.

Ministers are sufficiently concerned about senior-level talent in the civil service to place a priority on bringing in people from the private sector and the rest of the public sector. As the latest document on the civil service reform plan says: “To help close the key capability gaps … we will move to the presumption that senior civil service appointments below permanent secretary are open to external candidates.”

So let’s have a look at the remuneration policy intended to support this objective. The senior civil service is divided into three broad pay bands, from band 1 at the entry point to the senior cadre, to band 3 for the biggest jobs reporting to permanent secretaries. At band 1, the average civil servant gets about 60% of the remuneration on offer in the private sector when salary, bonus, long-term incentives and benefits are taken into account – a difference worth about £60,000 a year. At pay band 2 the figure is about 45%, and at band 3 it is about 35%.

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Pay is unrelated to performance
One has to wonder who is going to volunteer for a pay cut of that magnitude – and if they do, whether they are any good. Of course, the government can and does occasionally make an exceptional payment to bring in someone for a particular job (such as delivering the Olympics), but if the main pay policy remains in place, the room for manoeuvre is severely limited. Pay at the top includes few bonuses, and reward and collective performance are unrelated.

Until the party conference season, there was a slight hope that the drive for effectiveness and capability in central government would lead to a change of heart on pay, but even that has been removed. There is no prospect of Labour or the Liberal Democrats bringing anything other than hostility to competitive levels of remuneration in the senior civil service. And the chancellor has now announced a continuing clampdown on public sector pay through to 2017.

We will continue to offer too little to attract new people to top posts in central government. Their pay in future, as now, will be mostly fixed with hardly any variable, and their remuneration will go on having nothing to do with the long-term performance of their department.

Peter Smith - Hay Group

The chancellor needs to take the lead
There is an alternative to this practice of paying the wrong amount, in the wrong way and for the wrong things. It would involve the chancellor taking the lead in arguing for change in remuneration at the top of the public sector. He would have to take on political and public prejudice against competitive pay and bonuses, and make some big decisions about investment in people.

He would also be forced to define what performance is expected of them over the next three years, and be prepared to reward them if they deliver. He would need to acknowledge that, while private sector pay practice has many faults, the underlying philosophy makes a lot of sense.

None of this is easy, but without major reform to public sector – and particularly senior civil service – pay, it is hard to see how the government’s own stated objectives can be met. Means and ends have to be aligned: only connect.

An article from Peter Smith, Director in the Public Sector practice of Hay Group. This article was previously posted in The Guardian.