The salaries of top executives in the public sector must be reined in and a link established between the highest- and lowest-paid employees if pay inequality in the public sector is to be reduced, an employment expert has warned.
Will Hutton, executive vice-chair of the Work Foundation, who is leading a review into fair pay in the public sector on behalf of the Government, found that executive pay in the public sector had been rising much faster than the pay of rank and file employees.
He warned that there had been an "arms race" in top private sector pay, which was "showing signs of reproducing itself in the public sector," and urged state employers to be cautious about adopting best practice from the private sector, claiming that their pay practices and corporate governance had not delivered proportionality in pay.
Hutton recommended that the pay of management chiefs should not be more than 20 times that of the lowest paid worker in any public sector organisation.
The review stated that anyone who earns more than £117,523 is in the top one per cent of high earners. Around 20,000 public workers earn over this amount and some 4,000 of these are managers. The rest are mainly NHS medical professionals.
Hutton said: "There is a strong case for public sector organisations having to comply with, or explain why they do not comply with, a maximum pay multiple, such as 20:1. This would demonstrate fairness by reassuring public opinion, address a problem of collective action across remuneration committees, and benefit organisations' productivity."
Hutton cautioned that better governance and transparency were not enough and called for a comprehensive framework for fairness which would include disclosure requirements based on a pay multiple; better use of performance pay; and a renewed emphasis on ensuring labour markets for executives are properly competitive.
"Key issues of definition for the pay multiple need to be resolved, including the elements of reward included within the multiple, and whether 20:1 is appropriate for all organisations," he added. "Organisations would be able to exceed the multiple in exceptional cases but would have to explain their justifications for doing so."
The review also unearthed findings which included a tendency to recruit senior executives from narrow pools and a failure in the public sector to do enough to develop existing staff into senior roles.
Duncan Brown, director of reward services at the Institute for Employment Studies described the report as "essential reading considering the phenomenon of escalating senior pay across the economy."
But Dave Prentis, general secretary of Unison said the report missed the point. "By concentrating on the 20:1 pay ratio, that affects a miniscule 0.0001% of the public sector workforce, the report misses the elephant in the room, namely the scandal of low pay across the sector," he said.
"The Government likes to talk about fairness, but actions speak louder than words. Public spending cuts, plus the drive to privatise local services, is depressing wages, fragmenting the workforce and undermining moves towards fairness."
Sarah Welfare, deputy pay and benefits editor at XpertHR, echoed this view, saying: "In the public sector, a pay ratio could be problematic if rigidly applied, with employers facing a barrier to recruiting top talent when competing with the private sector. It might even give a perverse incentive to contract out low-paid roles or level up non-base salaries."
I would also question the usefulness of focusing on how salaries at the top of an organisation relate to those at the bottom, rather than trying to improve the fairness and transparency of pay systems overall," she concluded.
The Fair Pay Review will make detailed recommendations in its final report due to be published in March 2011.
For further information on pay and benefits, see XpertHR's November 2010 pay trends data.