In the second of three articles tackling myths about public sector salaries, Peter Smith looks at misunderstandings around top managers’ pay
Myth 2: nobody should be paid more than the prime minister It has become popular for commentators to use specific but arbitrary benchmarks for judging executive salaries in the public sector. For example, concern has been registered about all salaries over £150,000; there has been talk of a system of ratios, limiting a chief executive to no more than 20 times the salary of the lowest paid worker in the organisation.
Pay levels relate to the market for the job concerned; in particular they are designed to recruit, retain and motivate people with the necessary talent
Behind it all lurks the notion that no one should get more than the prime minister.
The PM’s official salary is £197,689, from a combination of his pay as an MP and his salary as head of government. He also has two final salary pension schemes (one for each of those roles), use of two houses and chauffeur driven cars while in the post and access to extensive earnings opportunities and support afterwards - though these additional factors are seldom mentioned.
The PM’s salary is subject to review by the Senior Salaries Review Body, and it is worth noting that increases have not kept pace with the wider market - the basic salaries of chief executives in major companies have risen twice as fast in the last 20 years.
But is this salary, and the extras that go with it, relevant to other public service roles? Pay levels relate to the market for the job concerned; in particular they are designed to recruit, retain and motivate people with the necessary talent. The operation of the market is well illustrated by pay figures for the senior civil service.
A high proportion of jobs at the top of government departments are filled from within the ranks of career civil servants. For this reason, the salaries are not as high as in public service jobs where there is open market recruitment. However, the pay of externally recruited senior civil servants is over 20 per cent higher than that of internal appointees.
The NHS also has two pay systems at executive level - the very senior manager arrangements which are centrally set and provider trust pay, which is set and reviewed by remuneration committees. Jobs in the latter category are recruited nationally, and both competition and a perceived shortage of top talent have fuelled increases.
The career path and skills involved in running a major hospital have nothing in common with the route to becoming PM, which is based on a political career and a constrained recruitment pool. It would only make sense to compare the salaries for top jobs in the public sector with the PM if they were operating in the same market. They are not and the comparison is irrelevant.
The essential point is that, whether a senior public official gets less or more than the PM, we have to make sure they are worth the money - and that their performance continues to justify the salary.
Myth 3: measuring and managing performance is difficult in the public sector
Why is reward not tied more closely to performance?
One reason has been that public sector organisations have found it difficult to define performance. They are complex and lack simple measures like profit or share performance; and it is not easy to cut through the hundreds of targets and measures imposed by governments and by audit regimes.
But the task is not impossible. The ingredients in a successful approach to performance management include:
- A clear and common understanding about what the organisation exists to achieve and its priorities (expressed in medium terms and annual plans). These priorities may overlap with those set centrally, such as by a government department, but it is vital that those in the governance structure and the executive team establish their own picture.
- Agreement about the roles and accountabilities of the chief executive and the directors.
- An understanding of what constitutes standard, effective performance for the whole organisation (running a safe and financially secure hospital, meeting audit guidelines and so on) and what stretching achievements are intended on top.
Even if all these tests are met every organisation has to face barriers of capability and culture. For example, public sector managers can be poor at feedback and some public service organisations are culturally opposed to differentiating performance.
So it is hard work to manage performance well and make some connection to reward, but it is worth the effort. And the alternatives - not managing performance, or paying people whether they perform or not - can only cause trouble.