Today sees the launch of my Fair Pay Review, which I was asked to conduct nine months ago by the Prime Minister and Chancellor. I’ve been of the view for some time that principles of ‘Fair Pay’ are urgently needed in the UK, both to guide those who determine pay and to reassure the wider public that such principles exist and are being followed. Citizens want to be satisfied that their scarce and hard earned tax pounds are being spent wisely and that public spending that should be directed for public benefit is not being squandered on excessive senior executive pay. In this context I define fairness in pay as the due desert for discretionary effort which delivers desired results. Reward should match the employee’s actions. Embedded in this notion is proportionality: due desert should rise proportionally as individuals make more of a contribution.
Fair pay - lifting the lid
15 March 2011
Yet much of the public debate about ‘Fat Cat’ pay in both the private and public sector has generated more heat than light. It has become axiomatic, for example, that despite leading organisations that are widely thought to be both inefficient and bureaucratic, most public sector managers are overpaid. However, it is my belief that there is indignation against public sector managers' pay largely because they have been caught up in the backlash against the huge growth of the earnings of the top 1 per cent over the last generation. Over the last nine years alone, CEO pay in our leading private companies has doubled, despite little tangible increase in performance. Bonuses have been paid in bailed-out banks, and there is widespread scepticism that these huge payments have been deserved. The public sector has not been immune from the same suspicion. The perception is that the public sector is also awash with ‘fat cats’; in one poll a quarter of respondents thought that public sector executives earned more than their private sector counterparts.
Some of the sums being paid at the top of private sector companies will seem eye-wateringly high: (HSBC said recently that 253 of its staff made more than £1m). Yet we are more likely to be forgiving if we believe that such amounts are deserved because their recipients have produced brilliant results as the result of hard work. The trouble is that in Britain there is no framework in either the public or private sector to explain why top pay is what it is. There is not a sophisticated understanding about the labour market for senior executives and we have an unhelpful tendency to pick arbitrary benchmarks (like the Prime Minister’s salary – which I address in my report) which serve to obfuscate rather than illuminate.
To address the need to bring some rationality, transparency and, yes, fairness into this debate, my report makes a number of important recommendations which I hope the government will accept. They include that from 2011-12 all public service organisations publish their top to median pay multiples each year to allow the public to hold them to account. I also propose that, to allow pay to vary down as well as up with performance, all public service executives should have an element of their basic pay that needs to be earned back each year through meeting pre-agreed objectives. This earn-back should be conditional upon meeting pre-agreed objectives; excellent performers who go beyond their objectives should be eligible for additional pay. In addition, and to make tracking pay multiples normal practice across the economy, as part of its commitment to improve corporate reporting, the government should require listed companies to publish top to median pay multiples in their annual reporting from January 2012.
The experience of writing my latest book ‘Them & Us‘ and conducting this Review has convinced me that ‘fairness’ is an elastic notion which, if not closely defined, is capable of being stretched into a range of different definitions and understandings, and then used to justify many different social and political choices. This is doubly so in the case of Fair Pay. My hope is that, with today’s report, I will have made a modest contribution to a much-needed national debate where opinion has trumped evidence for too long.