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Stephen  Bevan

Regional Pay – Can it work this time?

Authors: Stephen Bevan Stephen Bevan

30 November 2011

Tucked away in George Osborne’s Autumn Statement on Tuesday (29 November) was an apparently uncontroversial commitment to review the case for Regional pay in the public sector. For those of us who have been observers of public sector pay policy over the last two or three decades there was a more than a whiff of déjà vu in his announcement, which emulates very closely the aspirations of several of the Chancellor’s predecessors, including Gordon Brown.
Why Local Pay Determination Is Perennially Attractive to Chancellors
Back in 2002 the Comprehensive Spending Review (CSR) included proposals to increase local flexibility in pay across the public sector. A cross-cutting review of the public sector labour market – conducted by HM Treasury (HMT) - found that public sector pay tended to be uniform across the country, and did not vary sufficiently to address local recruitment and retention pressures. With regard to setting pay and conditions, the review revealed that there was significant room to move to increase the flexibility and responsiveness of the public sector labour market. This position was strongly supported by leading economists such as Professor Andrew Oswald, who was advising HMT at the time. To recognise local and regional market conditions through pay, especially for the low paid, the Government announced that the remit for the Pay Review Bodies (PRBs) and for public sector workers would include a stronger local and regional dimension.
The thinking behind this had several components:
  • Pressure for Paybill Control - HMT had conducted work to develop regional price indexes showing differences in regional inflation rates. This told them that, outside London and the South East, many public sector workers whose pay was determined nationally were being ‘overpaid’ relative to local pay rates and relative to regional inflation. Greater freedom to set pay rates locally (especially where local rather than national labour markets were dominant among lower-graded staff) was thought to be a simple way of reducing the total public sector paybill.
  • Responding to Local Labour Market Pressures - HMT also wanted to allow public sector pay structures to be responsive to fluctuating patterns of recruitment and retention flows. Local managers had often complained that their ability to attract and keep staff was hindered by what they regarded as a cumbersome national structure. In London and the South East managers also wanted the flexibility to compete in ‘over-heated’ labour market conditions.
  • Eroding Trade Union Influence - HMT also objected to what it regarded as the Trades Unions ideological adherence to National Pay Bargaining. It regarded this as significant obstacle to more delegated local autonomy not just in reward but in the determination of other terms and conditions of employment. One should bear in mind that the HMT also requested the majority of public sector employers introduce individual performance-related pay. This was also a contentious issue, with Trades Unions objecting to its use as a matter of principle. This policy was also interpreted by the Unions as part of an attempt to undermine their position and to ‘individualise the employment relationship’.
In practice, successive Governments have had to consider whether ‘local pay determination’ meant completely giving local employers power over pay bargaining (thereby eroding the need for PRBs and fundamentally altering the remit of bodies such as NHS Employers and Local Government Employers) or whether national bargaining would remain, with variable pay, allowances and market supplements being encouraged. Both approaches have been tried, most notably the local pay initiative in the NHS during the early 1990s and delegated pay across the Civil Service in the early to mid 2000’s.
Why Implementing Regional Might be Difficult
The Public Sector Trades Unions have consistently argued against the erosion of National Pay Bargaining. In part this is because they fear that this would also erode their influence and undermine arguments about the TU ‘wage premium’, which they regard as a powerful recruiting tool. But other bodies such as Industrial Relations Services (IRS) and Incomes Data Services (IDS) have also called into question the wisdom of certain aspects of local pay determination on technical grounds. The principle concerns include:
  • That local pay determination, especially if it resulted in significant differences in base pay, will make it more difficult to encourage senior staff or specialists to move out of London & SE – contrary to Lyons Review objectives. It was feared that national pay rigidities would be replaced by local pay rigidities, and that these would act as a barrier to the flexible deployment of staff to meet changing business needs.
  • That local pay determination might stimulate artificial and costly competition for talent – with ‘bidding-up’ breaking out between public sector employers within the same organisation (eg, DWP, HM Revenue & Customs or the NHS).
  • That TUs have better & quicker network of local information than local employers. Co-ordination between Unions will easily outflank co-ordination between employers, especially if they are in competition for some staff groups.
  • That local ‘reward management’ capability among managers who have always worked under a centralised system was generally considered to be weak. For example, Local Government Employers made delegated powers and harmonised pay structures available to all local authorities, but the take-up was very low because it stimulated no enthusiasm and threatened to increase workloads considerably. Delegated powers over some aspects of pay and conditions in the NHS – aside from Foundation Trusts – have only been patchily adopted.
  • High potential for ‘foot-dragging’ by Local Government Employers and NHS Employers, who were also seen by some to be wedded to National Bargaining and pay determination because these activities represented a large part of their raison d’etre.
  • Concern about the displacement costs of replicating bargaining processes locally and consequent dispute resolution. In addition, the time and costs involved in setting up and running a local or regional labour market and pay information infrastructure were also a factor. These were felt likely to cancel out many of the savings made.
There was also concern that some of the assumptions on which plans for local pay determination were based were incorrect. For example, analysis by the Internal Revenue Service (IRS) suggested that weekly average income in most regions was similar, with the exception of London and the South East. This argument was also reflected in analysis conducted by the Income Data Services in January  2003, which concluded that arguments for regional pay were based on a mistaken assessment of the extent to which private sector companies vary pay according to location - such as retail banks and supermarkets. They argued that the main determinants of pay setting were skill level, qualifications and job size rather than geography.
An Incomes Data Services (IDS) pay report from 2004 went on to identify other “potentials pitfalls of zonal pay”:
  • Equal pay issues: The allocation of sites needs to be clear and transparent and based on up-to date information otherwise it can be challenged under equal pay legislation. The Unions did not believe robust data existed to allow for the equality proofing of the pay system.
  • Fairness: Paying some staff more than others for similar work often creates resentment. The TU position was that members will be fundamentally opposed to the concept of applying pay zones on the basis of fairness.
  • Moving to a lower zone: It can be difficult to reallocate a site to a lower paying zone when labour market conditions ease. The IDS states that “typically organisations will only pay new premiums to new starters”.
  • Complexity: A system with different rates for similar jobs can be unwieldy. The IDS notes that: “Some organisations find that the benefits of having harmonised terms and conditions across all employees outweigh any benefits from pay differentiation”.

Where does this leave us?

Until recently more modern and innovative national pay agreements in the public sector, such as Agenda for Change in the NHS, had effectively killed off any aspirations the HM Treasury had for purely local pay bargaining and the local negotiation of basic pay. Having said that, pay-setting for very senior managers (VSMs) in Foundation Trusts is more delegated than in most parts of the public sector. However, there are now many examples of other aspects of pay and conditions where a local dimension is both available and (grudgingly) accepted by most Unions. Even with these local flexibilities, local managers still do not have the expertise, awareness or confidence to use them and so their effectiveness cannot be objectively evaluated. The inescapable conclusion is that, between local employers, Unions, employer bodies and Pay Review Bodies, there is a cosy consensus that National arrangements are the ‘least worse’ option and that the arguments for change – and the appetite for embracing change – remain very weak. While the high-level policy objective of Mr Osborne, as it was for Gordon Brown, is to reduce the public sector paybill, experience suggests that it is a lot easier to aspire to this than to deliver.