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15 March 2011

Hutton report does not explain how to make pay fair

Idea of pay ratio scrapped despite widespread support from the public.

By Tess Lanning

Pay has never been more contentious. Last week the banks paid out billions in bonuses, oblivious that the global economy is still reeling from their folly. As thousands of public servants seem on the verge of losing their jobs, details of public-sector “fat cats” paid hundreds of thousands of pounds are deeply unsettling. Have rapid increases in top private-sector salaries corroded public-sector values, too? Will Hutton’s wide-ranging Review of Fair Pay in the Public Sector, published today, grapples with the issue of who deserves what and why.

But Hutton has dropped his key recommendation from his interim report in December, which suggested that there could be significant benefits to introducing maximum pay multiples – where the highest-paid employee earns no more than, for example, 20 times the pay package of the lowest-paid employee – into the public sector.

Instead, he argues for strengthening performance-related pay mechanisms for public-service executives and sharing efficiency savings more fairly across the organisation. Hutton deserves credit for his recommendations that impose private-sector “incentives” on the public sector, such as penalties for failure and team bonus rewards.

Senior pay has increased much faster than average pay over the past few decades across the whole economy, with no discernible increase in productivity or organisational performance. In effect, CEOs and senior managers are simply receiving a greater proportion of the wage bill for no extra effort. The growth of high pay is far more pronounced in the private sector, but the public sector has tried to keep up with “market” rates, as Hutton points out.

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Yet Hutton fails to answer the burning question: how to ensure fair and proportionate pay within an organisation, whether public or private, which recognises that success (or failure) hinges on all employees, not one CEO or a small cadre of senior managers. Elemental to a principle of fair reward is to ensure that the public sector pays a decent wage to those at the bottom.

Hutton’s original recommendation of a pay ratio goes to the heart of this issue. The contribution of the person at the top depends on the other workers within an organisation. The wage distribution should reflect that contribution is relative.

According to a new poll by the Institute for Public Policy Research (IPPR), there is overwhelming public support for reform to ensure that pay is more fairly distributed. The results of the poll show that fewer than one person in ten (9 per cent) thinks there should be no limit on the amount paid to top staff. Seventy-five per cent of the public supported Hutton’s original idea of a pay ratio, with almost two-thirds (61 per cent) saying the limit should be 10:1 or lower. A ratio of 10:1 would mean a maximum salary of £123,000 for organisations that have staff on the minimum wage.

Many of the criticisms levelled against pay ratios – and presumably the reason Hutton has dropped them – are practical. The main risk is that organisations could simply contract out lower-paid staff. Would it apply to the private-sector organisations contracted to clean or audit government offices, or the corporate giants that now run many of Britain’s services, from prisons to back-to-work support? And would it be enough to ensure that low-wage public-sector workers receive a bigger slice of the public-sector wage bill?

Despite these concerns, the principle of ensuring that pay is distributed more fairly remains a powerful one. There could be other ways to achieve the same goal, such as ensuring that lower-paid public-sector workers make up a given proportion of the wage bill, or are guaranteed a certain proportion of future pay increases. What is clear is that the public wants politicians to put their weight behind reforms to make pay fair.

Tess Lanning is a researcher at IPPR.