Civil servants could be stripped of their performance-related bonuses and see their basic salaries cut, under plans that could be announced in the Budget this spring.
Chancellor Alistair Darling has indicated that routine payments of bonuses to top public sector workers were likely to be scrapped.
Last year, mandarins received more than £100m in bonuses.
Darling said: “What is being paid has sometimes lost the relationship it ought to have with what someone actually does. Once that happens, it’s not only unfair, it’s actually grossly inefficient.
“In some quangos, local authorities and other organisations, the level of pay, especially at the top end, and bonuses have reached the stage where they don’t pass what I call the next-door neighbour test. If you can’t justify them to your neighbour, you’ve probably got it wrong.”
The chancellor suggested some public sector workers could face pay cuts in the future to avoid widespread Whitehall job losses, the Sunday Telegraph reported.
He said: “There’s a lot of evidence that people in the private sector have taken pay cuts and held on to their jobs.”
The chancellor has ordered a wide-ranging study of public pay from the Senior Salaries Review Body (SSRB). The SSRB will report to the Treasury before the Budget, expected to be held in March, when Darling is expected to outline plans for a crackdown on excessive pay and perks.
Public sector workers already face a 1% cap on pay rises from 2011.