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So here I am in the Treasury, talking to Will Hutton who’s undertaken a review of Fair Pay; it’s being published today. Will, can we just start of by you telling us what are the core principles at the heart of the approach you’ve taken in this report?
Well it’s fairness. But it’s fairness as more than apple pie and motherhood. It’s quite a close definition of fairness. Fairness is about proportionality, and it’s about anyone getting the proper dessert, due dessert, the appropriate dessert for the contribution that they’ve made.
So the idea is that what you’re trying to do is to calibrate salaries in the public sector, and by the way I think the same principles apply in the private sector, to actually the weight and complexity and responsibility of the role that is undertaken and how well it’s been discharged. And that should be how we approach pay in the public sector, rather than saying, ‘gee whizz what a lot of money so on is making’ you’ve got to look at what actually they are contributing.
In relation to how you deliver that, it seems to be the concept of earn back is at the heart of your approach, can you explain how that’s going to work?
The idea is at the top of an organisation, both you and the people to whom you are accountable need to establish what it is you are trying to do with the organisation and in the year in question and you should place a part of your salary at risk. At least ten per cent, maybe more. But at least ten per cent, which you have to earn back by actually achieving those performance indicators; what’s been pre-declared at the beginning of the year to be what you should do. And only if you do that should you be entitled for any kind of enhancement or increment to your pay.
So the idea is that you put if you are at the top of the organisation you’ve got some skill in the game, you’re at risk and if things go badly, tax payers can be assured that you are not going to walk away with no impact on you. It’s a no rewards for failure regime. It’s also a way of actually honestly reflecting fairness. Only if you’ve done the job as specified are you going to get the pay at the top; only if you over perform are you going to get more.
Now you’ve got extensive experience working in organisations, in the private and the public sector; there are some kind of perverse outcomes that are in danger with performance related pay systems. Are there any concerns you’ve got, how can we ensure that the way earn back is operated doesn’t lead to perverse outcomes, people setting targets that they can easily reach for example?
Well I mean, it’s true, that there are those problems. The first thing I say is that not doing this, not having earn back in place and pay at risk in this way is as big a decision as doing it. As, you are saying look we don’t want to have a conversation about what a good performance might look this year. We can’t actually for the life of us think about what those things could be and not doing that is as big a statement to a chief executive as not doing it. And it maybe that you do make mistakes for the rest of the year, I’d live with that for the price of the bigger goal which is actually legitimising the pay a man or woman makes and actually ensuring that they’re doing their job really well.
The second thing is, is that you’ve got to have remuneration committees that are able and wise enough to set these standard. And I think that not only should there be independent non-exec directors on them, but a representative of the workforce who knows necessarily what’s going on in the organisation. Probably best actually and actually what really is the challenge in the year ahead.
And thirdly, there’s the reporting framework. You are going to have to report the multiple of the top person’s pay including whatever enhancement there might be in relation to the medium year by year. So that if that goes up markedly you’re going to have to explain, the organisation is going to have to explain, to the taxpayer the employee and the citizens that have been using the service, why that happened. And if there aren’t damn good reasons, there will be problems.
I sense throughout the report that this idea of transparency is the central feature of the system. That in a way you’ve rejected the idea of a fixed multiple because you feel that as long as people are held to account, it’s in the public domain, there’s employee engagement, that those pressures will be sufficient within a system that is fairer and is seen to be fairer?
That’s my view, that is my view. I think if you have an arbitrary ban on paying people some multiple of the bottom person’s pay, but it is arbitrary, it is inflexible. You can get to a situation where a large complicated organisation with lots of people in it, that the pay is artificially held low. Somebody else’s pay who’s running a simpler organisation, where the bottom persons pay is simply higher; and that’s a mad mad situation to get yourself into and you don’t want to be in that place.
It’s much better to create the framework where you’re talking about: Is the pay deserve? Is there a real accountability mechanism? Are the performance indicators being well set? If they’re not, is there some feedback loop that will correct them? Is the person at the top at risk if things go pear shaped? That’s really what you want, rather than an arbitrary ban if you like, on how much someone can make.
You’re someone who’s associated with a broadly progressive approach, do you have a nervousness that in the light of caps on public sector pay, in the light of the other Hutton report of the past week that there will be a kind of sense of we are really beating up on public sector workers at the same time private sector is allowed to carry on alone, in its own sweet way?
I think there’s two things to say. First of all, I think that had I opened up this report by a big statement that actually the public sector and government and public knows is actually essential and indispensable to well being, civilisation and actually economic growth. I need, it is needed what the public sector rules will allow us is a framework with which when it gets attacks on how much its paid, that it has a framework that can say ‘hold on, look it isn’t, it is justifiable, it is proportionate’ and actually look at our peers in the private sector.
It’s also a challenge to be put to the private sector. I’m hoping the government will actually require companies to report their pay multiples in the same easy and transparent and easy to understand way that I’m asking the public sector to do.
So my pushback on this is two fold. One, I think we need to re-legitimise the public sector and we need to permit it to recruit and retain really talented people and to give talented people the sense that actually they are valued and that there is a framework that permits their valuation. At the same time it’s a challenge to the private sector to say, don’t run away with the notion that you are so much more brilliant than the public sector. You are paid very very very much more. What are doing to justify that? Do you have the courage to reproduce the kind of principles the public sector is using in how top people’s pay is determined?
Well I think it’s a great report and hope people do read it from beginning to end before they rush to judgement. Will Hutton, thank you very much.
For all general enquiries about the Hutton Review of Fair Pay in the Public Sector please contact the Treasury Correspondence & Enquiries Unit: