Pay Multiples: Policies on the Relationship Between Top Pay and that of the Rest by Benjamin Irvine
Despite the requirement in the guidance notes for Local Authority Pay Policy Statements to clearly state what they think the relationship should be between the pay of chief officers and staff who are not chief officers, there is a lack of policies for assessing, justifying and achieving appropriate pay multiples.
Rather than creating independent policies to assess what fair and justifiable pay ratios might be and how to achieve them, they are almost unanimously justified as following from the ‘objective’ and uncontrollable processes which are used for setting pay and grading structures. A recurring justification in statements is that the pay multiple ‘results from the detailed implementation of the pay policies as set out earlier in this statement’.
This leaves pay multiples to follow from the use of recruitment consultant’s to ‘objectively determine the market rate’ for senior roles, therefore reflecting the broad finance led high pay inflation in the external labour market (“…the ‘disproportionate influence’ of the financial sector is thought, over many years, to have driven the huge increases in executive pay .” Simms and Boyle, 2011. p.4; See: http://www.livingwage.org.uk/how-become-living-wage-employer), and whatever pay settlement has been achieved, or more often has not been achieved, through the National Joint Council which is the basis of most LA pay setting for the majority workforce. There has been no pay increases agreed through the National Joint Council since 2009, in fact there has been a real terms 18% reduction.
This has led those Local Authorities dissatisfied with the stance of Local Government Employers in Collective Bargaining to make more equitable settlements locally through Living Wage policies.
The intended purpose of pay policy statements; to force Local Authorities to disclose and examine their internal pay inequality, is therefore failing as statements are leaving high pay inflation and low pay reduction unexamined. This is compounded by Council’s incorrect use of Hutton Review guidance, absolving pay multiples from interrogation by comparing them to an arbitrary upper limit of 1:20, which was not recommended.
The external benchmarking of top pay in the context of unexamined finance-led high pay inflation in the external labour market and the use of an arbitrary 1:20 limit to absolve pay multiples from further explanation, represent the two main recurring and problematic principles being used to assess and justify pay multiples which are signified in the above table by red asterisks (**). Both have malign consequences which prevent council’s from genuinely assessing their multiples and actively managing them and should be removed from top pay setting and pay policy statements respectively.
1: The use of an upper limit of 1:20 against which to compare Local Authority pay multiples
The recurring phrase included in many Pay Policy Statements ‘multiples are well within the 1:20 ratio recommended by Hutton’ is highly misleading, it implies that the Hutton Review and DCLG guidance recommends that as long as multiples do not exceed 1:20 they are fair and need not be examined. It is factually incorrect to suggest that The Hutton Review recommended that Local Authorities should compare their ratio’s to this limit. Although this was included in the terms of reference of the review it concluded that the use of such a limit was not advisable, it didn’t take diversity of organisational structures into account and was actually higher than most pay multiples observed across the public sector, especially in Local Authorities. It would only have effected 70 senior managers and could have therefore created a perverse incentive and ‘even become a target for executives [who are currently] earning less’ .
A one-to-twenty pay ratio is not the government-recommended acceptable maximum top-to-bottom pay ratio, nor was it recommended by the Hutton Review. Therefore it should not be invoked as a reference point in Local Authority Pay Policy Statements. This issue has been raised previously in a nationwide report on Local Authority Pay Policy Statement reporting.
(One Society, 2012. p.22, One Society, (2012). ‘Leading the way on fair pay: an assessment of principal local authorities in England and Wales’, London: One Society: http://www.equalitytrust.org.uk/sites/default/files/Fair%20Pay%20Report.pdf)
2: The use of external benchmarking in monitoring pay levels and pay multiples
Many Local Authorities in our study referred to external pay market benchmarking when setting pay and monitoring pay multiples. 7 out of 10 Local Authorities included the phrase:
“As part of its overall and ongoing monitoring of alignment with external pay markets, both within and outside the sector, the council will use available benchmark information as appropriate.”
Some Local Authorities also referred to the use of recruitment agencies in recruiting chief officers to ‘objectively determine the market rate for the role ‘. Whilst many expressed the need to balance value for money with setting Chief Officer pay at the right level to attract and retain staff with adequate skills, knowledge and experience. The practice of external benchmarking, that is the use of labour market data increases in executive pay from outside the local government sector will, in the absence of substantive policies on pay fairness, mean that pay inequality will only increase. Private sector executive pay, and the pay gap, is grossly higher than in the Local Government sector. By way of example, the average estimated total awards made to FTSE 100
CEOs in 2011 was 408 times the National Minimum Wage and 219 times UK median earnings.
The growth in private sector top pay shows little sign of reversing and was the underlying cause of public sector top pay growing faster than entry salaries in the first place, through external labour market competition effects.
Public Sector pay dispersion has been relatively insulated from the polarisation of pay rewards in external labour markets by virtue of public accountability and the retained level of worker unionisation. As such it remains a comparative beacon of pay equality and should work pro-actively to reverse the broader trend by ceasing to benchmark outside of the sector when setting Chief Officer Pay. Commitment’s to social cohesion should outweigh anxieties concerning the tenuous link between pay and performance. Comprehensive research evidence suggests financial incentives have a zero or negative effect on performance.
(Daniel Pink, Drive: The Surprising Truth About What Motivates Us. 2010. Edinburgh: Canongate.)
Even benchmarking to ensure parity across the sector will only keep pay multiples stable and not address the widened pay gap between top and entry salaries which occurred in the 10 years prior to the Hutton Review. Unless the pay gap is addressed simultaneously by all Local Authorities, whenever a pay gap does shrink for an incidental reason in an individual LA, practices of benchmarking and job evaluation by Recruitment Consultant’s will soon justify top salary increases. This was recently the case in Rochdale, which had the lowest top-to-bottom pay multiple when we collected Pay Policy Statements but subsequently commissioned a pay review which found that the Chief Executives salary was the lowest in the region and proposed a £40k increase. The Local Authority was pressured to reduce the increase to just £1,300 following public outcry from residents and criticism from Rochdale MP Simon Danczuk.
There is therefore a need for Local Authorities to assert a firm position in relation to pay setting, do they think current pay multiples should go up or down? Had Rochdale genuinely endeavoured to set a pay multiple that was, ‘appropriate to local circumstances and ensures value for money for local taxpayers’, it would have been unlikely to recommend an increase and would have avoided some embarrassment, as well as the cost of the pay review. This is obviously the result of a passive approach to pay multiples and pay setting.
Examples of a pro-active approach to pay setting in the context of widening pay inequality are Kingston upon Thames and North Somerset , which have reported that they have ‘moved from seeking to pay at mid-market rates to lower-quartile and ten per cent below median respectively’.
Absence of Target Pay Multiples
No authority in our study explicitly stated a commitment to reduce or maintain their pay multiple at a specific level. Far from the apparent tendency of Greater Manchester Local Authorities to see multiples as not directly controllable, over 10 percent of UK LA’s have set clear goals to reduce their pay multiples, including Newcastle and Brighton and Hove.
Others such as Reading and East Sussex committed to maintain current pay multiples. Despite reporting a small decrease from 9.4:1 to 9.2:1 in the top:median pay multiple, Manchester City Council stated that it does not have a target pay multiple and does not propose to set one for the foreseeable future, asserting that the Hutton Review concluded that they ‘serve no useful purpose.’
It has been argued elsewhere that such statements by Local Authorities are a misreading of the Fair Pay Review.
The review concluded that a hard cap of 1:20 would be inoperable across a diverse public sector but did not oppose pay multiple targets within individual bodies.
We would recommend active management of pay multiples, through commitments to reduce or maintain them for the reasons outlined above; passive management fails to redress the pay gap that opened up in the 10 years prior to the Hutton Review and higher external levels of pay inequality exert a continuing magnetic effect on top salaries.
Salford has notably effectively fixed the top:bottom pay multiple until 2016 by committing to the full Living Wage and no senior officer pay increases until then, but this is not explicitly stated in the language of pay multiples. We would argue there is a value in organisations coming to a democratic agreement about what constitutes a fair and appropriate pay multiple target and making clear commitments not to exceed it.
Other Issues
It is notable that many Local Authorities have significantly reduced the number of senior management posts in response to large budget reductions and have noted this in their policy statements to demonstrate the reductions in costs associated with senior pay. In Rochdale senior posts were reduced by over a half. ‘This represents a 58% reduction in the senior management team and these changes to the structure have contributed significant savings towards the Council’s overall budget reduction.’
There is a danger that reducing the overall cost of senior pay by deleting posts is seen to negate the need to look at moderating salary levels for senior managers. With many managerial roles abolished, the few that remain have much greater responsibilities which are likely to justify increases in remuneration in the near future. This is in fact precisely what occurred in Rochdale during the course of this study.
In the face of budget reductions exploration of options to work share would be preferable from a Steady State Economic perspective; to reduce unemployment through the sharing out of the available work that is necessary and worthwhile, encouraging fulfilling, well-rounded and sustainable work and consumption lifestyles. This reduces the need to create jobs which are based on unsustainable consumption. A reduction in work time should lead to higher well-being, the ability to better participate in the caring economy and in communities more broadly, and greater productivity whilst working.
Sometimes the existence of living wage policies and comparisons of pay multiples does not capture the finer details of controversy around pay levels across the workforce. Salford’s plan to implement the full living wage included median income workers taking a pay cut whilst top pay stayed the same and was accused of ‘robbing poor Peter to pay poorer Paul’.
Policies Towards the Pay of Staff Working for External Contractors
The Localism Act indicates room for local authorities to develop local policies towards the pay of staff working for external contractors and for this to form part of public pay transparency.
‘an authority which has or develops a local policy towards the pay of staff working for external contractors with whom the authority has contracted to perform services, may wish to articulate that policy in their pay policy statement.’
No authority in Greater Manchester included a pay policy towards external contractors in their most recent pay policy statement. To clarify whether levels of pay inequality in procurement partners was in any way considered in the procurement process we submitted Freedom of Information Requests to Local Authorities in the North West requesting details of the pay structures of their suppliers and asking explicitly about the existence of any procurement guidelines in place in relation to the pay of staff working for external contractors. The pay data of suppliers was unanimously not collected by Local Authorities. This meant we were unable to assess the levels of pay inequality and the prevalence of low pay within contractors which provide public services in GM.
This is a legitimate concern for residents, the publication of pay multiples by contractors who provide outsourced public services was also recommendation of the Hutton Review. 8 out of 10 Councils stated that they currently had no policy or procurement guidelines in place in relation to the pay of staff working for external contractors. Stockport said it was considering the implications of stipulating the Living Wage to be paid as a minimum but there was no firm policy decision at the time. Salford and Oldham are the only two councils in Greater Manchester which confirmed in response to our request that they have procurement policies place in relation to the pay of staff working for external contractors. These are detailed and assessed in the following section.
The following are Local Authority responses to a Freedom of Information request by Steady State Manchester and Equality NW first made on the 11th of April 2013 to the question:
‘Do you have any policy or procurement guidelines in place in relation to the pay policies of organisations you procure or commission goods and services? (For example a requirement for suppliers to pay the Living Wage of £7.45 per hour as a minimum or consideration of the organisations pay dispersion, or pay multiple, in informing procurement)’:
Manchester
‘The Council does not have a policy in place in relation to the pay policies of external organisations.’
Salford
‘the council does not currently specify in any tenders that the living wage of £7.45 an hour is required. The City Mayor is currently developing an Employment Charter which will set minimum standards for people in work. This will include the Living Wage. The city council hopes the Charter will be agreed with a wide range of employers. We are currently in talks with a number of our partners about their potential introduction of the Living Wage. We are also carefully considering what extra procurement freedoms the new Social Value Act will give us as both an employer and commissioner of services in improving the terms and conditions of working people in Salford. This is a high priority for the City Mayor.’
Trafford
‘We do not hold pay data for organisations we commission or procure goods and services from. The only exception to this would be if TUPE* applies on a transfer of undertaking, however this would be classed as commercially sensitive data. So with regret we are unable to provide any data in response to your request.’ (*The Transfer of Undertakings (Protection of Employment) Regulations protects employees’ terms and conditions of employment when a business is transferred from one owner to another.)
Oldham
Going forward, we now include some elements of the Council’s Social Value Framework in all of our tenders, though this may not be related to pay in any given tender. One of the outcomes of the framework is as below, with what this could mean in relation to our expectations from prospective suppliers below that. Outcome; A local workforce which is fairly paid and positively supported by employers
Rochdale
We only request pay policies depending on the type of contract. We do state that they must comply with all current legislation and that would include paying minimum wage but we don’t have policies regarding an organisations pay policy in relation to living wage.
Wigan
‘Wigan has no policy regarding Living Wage as this is only discretionary but we would require compliance with all relevant legislation which would cover minimum wage.’
Stockport
The Council is currently considering the implications of stipulating the Living Wage to be paid as a minimum but this has not yet been implemented. Suppliers have been included in discussions but at present there is no firm policy decision.
Bury
In response to your request for supplier/contractor pay data I write to advise you that this information is not held by Bury Council.
Bolton
As requested verbally on the phone yesterday, I have checked and it would appear that there are no discussions about Bolton heading down this route at the moment.
Tameside
‘at this time we do not have a policy or procurement guidelines in relation to the pay policies of organisations we procure or commission goods and services from.’
Policies Towards the Pay of Staff Working for External Contractors
The Localism Act indicates room for local authorities to develop local policies towards the pay of staff working for external contractors and for this to form part of public pay transparency.
‘an authority which has or develops a local policy towards the pay of staff working for external contractors with whom the authority has contracted to perform services, may wish to articulate that policy in their pay policy statement.’
No authority in Greater Manchester included a pay policy towards external contractors in their most recent pay policy statement. To clarify whether levels of pay inequality in procurement partners was in any way considered in the procurement process we submitted Freedom of Information Requests to Local Authorities in the North West requesting details of the pay structures of their suppliers and asking explicitly about the existence of any procurement guidelines in place in relation to the pay of staff working for external contractors. The pay data of suppliers was unanimously not collected by Local Authorities. This meant we were unable to assess the levels of pay inequality and the prevalence of low pay within contractors which provide public services in GM.
This is a legitimate concern for residents, the publication of pay multiples by contractors who provide outsourced public services was also recommendation of the Hutton Review. 8 out of 10 Councils stated that they currently had no policy or procurement guidelines in place in relation to the pay of staff working for external contractors. Stockport said it was considering the implications of stipulating the Living Wage to be paid as a minimum but there was no firm policy decision at the time. Salford and Oldham are the only two councils in Greater Manchester which confirmed in response to our request that they have procurement policies place in relation to the pay of staff working for external contractors. These are detailed and assessed in the following section.