'Fairness matters': Will Hutton is not a simple bloke. Working with him on the expert group to the Fair Pay Review, whose final report was published yesterday, you realise that his brain is enormous. The final report from Review of fair pay in the public sector, which he has led, rightly puts senior pay in its wider social and economic context. To address the issues of executive pay, we have to ask ourselves what sort of society we want to live in and what sort of government we want to have.
The report brilliantly dissects the issues and highlights how top people's pay has pulled away so spectacularly from everyone else's, particularly in the private sector but also in the public. In a 130-page report bulging with facts, figures and a dozen recommendations, we learn that FTSE 100 CEO pay has more than doubled over the past decade - up to 138 times average earnings - with pay ratios between the highest and lowest earners across the public sector also increasing up to fifteen-fold.
Confused, devolved pay responsibilities and governance; inadequate pay transparency; insufficient competition in executive labour markets; and weak talent supply pipelines have all contributed to this wider pay dispersion (as well as to the gender pay gap).
Simpler minds in the media may grasp the initial recommendation, that "the government should not cap executive pay across the public sector but require all public service organisations to publish their top to median pay ratios each year" as a climb-down, a cop-out, abandoning the original idea of a fixed 20:1, highest:lowest pay cap across all public-sector employers. The report points out that such an arbitrary and uniform cap would, ironically, be "unfair, hitting some organisations harder than others". The report also defends the need for high quality public-sector leaders to be paid appropriately and competitively.
But in reality, the report presents a comprehensive framework to manage public sector pay in the future in a more informed, rational and controlled way, with significant implications for the private sector, if its recommendations are accepted in full by the government. It could radically change executive pay determination in a largely positive direction and should be required reading for all remuneration committee members and HR directors in all parts of the economy.
You and I may quibble at the practicality of some of the recommendations. Putting a proportion of senior public servants' pay genuinely at risk and needing to be "earned back", in return for the opportunity to earn more in bonus through high performance, is a nice concept. But it ignores the natural tendency of executive bonuses in all parts of the economy to become, in reality, budgeted and expected fixed costs. Employee representatives on remuneration committees may be a headline-grabber and putative Labour party policy. But it raises all sorts of practical issues of supply, selection and training.
These are merely quibbles, though. The principles set out in the recommended and detailed Fair Pay Code of practice, which all public-sector organisations would need to adopt on a "comply or explain basis", summarise the report’s recommendations to address the core issues: fair and appropriate pay levels set through appropriate internal and external comparisons; fair pay processes, with genuinely independent and competent remuneration committees in all parts of the public sector; and improved transparency and accountability, "moving from disclosure to explanation" with the annual publication of fair pay reports.
Will's frustration at being unable to apply his thinking and findings to the private sector is palpable throughout the report, and he pushes the review's terms of reference as widely as possible. What is referred to as the "public services industry" of major outsourcing firms, many with significantly higher paid executives than those in public-sector bodies, will be strongly encouraged to apply the proposed code of practice.
Fairness matters to all of us. It always has done but the issue has been brought to the fore by the recession and by public sector and welfare cuts. There is plenty of evidence now available that wide pay differentials have negative social consequences and that, above a certain minimum level, most of us care more about relative than absolute pay levels.
If the review achieves its goal "to ensure that decisions on executive pay take account of the whole workforce context", and in the context of organisation-specific reward strategies that are driven by the corporate goals and employee needs of each, unique organisation, rather than simply boiler-plating external practice and ratcheting up pay on that basis, then it will have genuinely succeeded. Great job, Will!
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What price fair pay?
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