In the last in this series on public sector pay myths Peter Smith examines some ideas about bonuses in the public sector, and senior salary transparency

Myth 4: bonuses don’t work in the public sector

Let’s start with a definition. A bonus is a one-off payment to reflect some sort of achievement; unlike a salary increase,

bonuses do not commit the employer to further spending later, nor do they attract pension contributions.

There is an assumption among some commentators that bonuses are about individual performance, but this is not necessarily true. There can be team bonuses, and a payment to all employees to reflect the performance of the whole organisation is a form of bonus.

Bonuses are smaller and less common in the public than the private sector and there is a long tradition of concern about public service bonuses. The banking crisis has led to greater criticism, even though city practices have little in common with the rest of the economy.

Opposition to bonuses tends to concentrate on three arguments:

  • It is said that bonus payments do not motivate, but most schemes are far more subtle. Their aims are to help communicate the priorities of the organisation to the individual and to ensure remuneration relates to performance. During low inflation and a recession, a bonus can provide clearer recognition of excellence than an extra 1 per cent on salary.
  • There is concern about the cost of bonuses, the assumption being that the money involved could have been saved, or spent on essential services. However, if the choice is between delivering a competitive level of remuneration through salary and bonus or through salary alone, the former is both more flexible and more cost effective. 
  • There is a belief that bonuses - and performance related pay of all kinds - simply do not fit the culture. However, predominant cultures can change and have changed over time - some public sector organisations are recognising performance through their remuneration policies but are not acknowledging it publicly.

Some medics would express opposition to performance pay, but they already have it in the form of clinical excellence awards.

So many arguments against bonuses are misleading or weak and bonus schemes have the potential to provide a flexible and cost effective form of reward, which communicates performance priorities.

Bonuses have a bad name because some schemes are poorly designed and can distort performance (of bankers and others). However, an extensive Hay Group and Institute for Employment Studies analysis of team rewards in the NHS showed that properly designed and managed bonus schemes can make a big impact even in the most apparently unwelcoming environments.

There is a risk now that too many people are almost unthinkingly opposed to bonuses. This might dilute still further the relationship between pay and performance in the public sector, when in fact it should be strengthened.  

It is only sensible to relate rewards to performance. The alternative is to pay people the same whether or not they perform - which is not even common sense, let alone good use of public money.

Myth 5: disclosure of executive salaries in the public sector causes trouble

Many public sector bodies disclose executive remuneration - NHS trusts all list director salaries, bonuses and benefits in their annual reports.

It is now likely that there will be additional requirements on all parts of the public sector to disclose senior level pay. There is a risk that, as now, the approach will still be grudging and public sector organisations will explain the minimum possible.

Yet there is the potential to take the initiative and manage the story. 

The present high level of scrutiny provides an opportunity for NHS trusts and others to take four steps:

  • Policy: review and clarify the remuneration policy affecting the chief executive and senior posts specifying how remuneration should be set, how it is composed and why. 
  • Process: ensure there is a sound structure of governance and there are good processes for review, both annually and for new appointments.
  • Performance: tie remuneration clearly and explicitly to the performance of the organisation and, where appropriate, the individual and/or team. The measures of success should relate as closely as possible to service performance as it affects patients and the public. 
  • Publication: tell the remuneration story on your own terms. Explain the policy, the governance process and the relationship to performance, so that readers see not only what people are paid but why.

Organisations which deal properly with these four Ps will be in a far stronger position on top pay than those that do not.