We cannot address public sector pay without addressing private sector pay

The data about the earnings of ‘council fat cats’ need to be put in context; we cannot address public sector pay without addressing private sector pay.

Duncan Exley is the campaign director for One Society

Stories about “council fat cats” earning more than the prime minister are becoming something of a tradition. Yesterday’s story, covered by the Daily Mail, Guardian, Independent and Sun (among others), is based on data from Incomes Data Services, showing that 43 per cent of surveyed local authorities paid their chief executives more than David Cameron’s £142,500 salary.

It is good that high public sector salaries are being scrutinised, especially at a time when many of the lowest paid public servants are facing unemployment.

It is also welcome that the government has commissioned Will Hutton to make:

“…recommendations on how to ensure that no public sector manager can earn more than twenty times the lowest paid person in the organisation.” (In a review of Fair Pay in the Public Sector, the policy background to the public debate).

However, the data about the earnings of ‘council fat cats’ need to be put in context: not only does Hutton’s interim report point out that the highest public sector pay ratios are not in local authorities (“the highest ratio was in higher education”), it also demonstrates why we cannot address public sector pay without addressing private sector pay.

The most obvious link between public and private sector pay is the fact that:

“Recruitment from the private sector is currently limited, but where it does occur it has contributed to senior pay inflation.”

Perhaps recruitment is limited because the public sector already cannot afford to attract senior staff from the private sector?

According to data quoted by the Department for Business, Innovation and Skills, FTSE 100 CEO pay in 2009 was 115 times higher than average pay in the same organisations; how much more those CEOs are paid than “the lowest paid person in the organisation” can only be guessed at.

But the real elephants in the room are those companies in receipt of substantial public money. Surely we can expect, if we are keen to ensure that taxpayers’ money is spent in a way that gets good value and promotes fair rewards, that the government will consider:

“…recommendations on how to ensure that no private sector manager whose business is mainly based on public money can earn more than twenty times the lowest paid person in the organisation”?

At the moment:

“Remuneration in firms within the contracted-out public services industry reflects private, rather than public, sector norms.”

But those companies – and those whose low pay business models are effectively subsidised by tax credits – do not even have to report on their pay ratios.

23 Responses to “We cannot address public sector pay without addressing private sector pay”

  1. Ed Kelly

    RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay: //bit.ly/fV59RY

  2. simpkins83

    RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay: //bit.ly/fV59RY

  3. Tacitus

    Of course it is correct that public sector pay should come under scrutiny – particularly the pay of senior managers and chief executives. However, before we go on some kind of witch hunt, let us not forget that the majority of public servants are amongst our lowest paid, yet provide an exmplary service.

    Before we slash public sector pay, let us compare it with the private sector to ensure parity. In many instances this would mean councils having to increase public sector pay.

  4. michael firth

    RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay: //bit.ly/fV59RY

  5. Hitchin England

    RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay: //bit.ly/fV59RY

  6. Matt Jeffs

    RT @HitchinEngland: RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay: //bit.ly/fV59RY

  7. Penelope Homer

    RT @HitchinEngland: RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay: //bit.ly/fV59RY

  8. reded

    Public sector workers form the backbone of the stable and secure state that facilitates the pillage of all our resources by the private sector.

  9. WHAT?

    It seems like your suggesting either:

    a. Public sector executive pay should be increased to comparable levels of the private sector to counter “limited recruitment”.

    or b. Ratios of private sector executive pay to that of “the lowest paid person in the organisation” over that of the public sector (x20, incoming) should be legislated against.

    Either way you are mad.

    Whether a company gets 51%, 10%, 100% 0r 0% of its revenue from public sector contracts doesn’t matter. It’s a private company. It’s only responsibilities are to its shareholders. It’s pay ratios are its own business. If everything is legal then it is no matter to anyone else what they do. Private, remember, as in ‘none of your business’.

    Please can we have some quality analysis rather than stupid sensationalist ‘articles’ like this. Almost as bad as the land-tax one. Bring back W.Straw.

  10. One Society campaign

    We blog on @leftfootfwd that you cannot address high public sector pay without addressing high private sector pay //bit.ly/fV59RY

  11. One Society campaign

    Our blog on @leftfootfwd – you cannot address high public sector pay without addressing high private sector pay //bit.ly/fV59RY

  12. ChurchActionPoverty

    You cannot address high public sector pay without addressing high private sector pay: //bit.ly/gu51r6

  13. Morna Simpson

    Debates on Public Sector pay on Left Foot Forward //bit.ly/fMMxbI RT

  14. One Society campaign

    Responding to yesterday's figures on high chief executive pay in local authorities, we have blogged on Left Foot… //fb.me/vRJK56Yp

  15. Mister Jabberwock

    You do realise, I hope, that there is no comparison between being CEO of a council and running a business with even a small fraction of the turnover of a council.

    The latter is just (simplistically) a matter of spending money – and it is very important it is done well; but that is qualitatively different from having to create and maintain revenue from customers who can choose whether to give their business to you.

    Creating and running a successful private business is as different from running a council as lighting a fire without matches is from cooking on it once it is lit.

  16. George McLean

    @ WHAT?

    Would you object to workers in a private company knowing what the CEO and the lowest-graded member of staff earn, so that there is transparency on the earnings ratio?

  17. Duncan Exley

    In response to “WHAT?”:

    My piece suggests neither that public sector pay is increased to meet private sector norms, not that private sector pay should be capped at 1:20. It does suggest that private sector pay is relevant to public sector pay.

    I also suggest that private companies should not be “private…as in ‘none of your business'”, because I – and the rest of us – have an interest as taxpayers in those private sector companies which comprise large parts of the public sector or which otherwise depend on public money. We also have an interest in companies behaving in a responsible way – a principle recognised by the Companies Act.

    It is true that companies have a responsibility to shareholders, which is why I suggest that they should report their pay ratios (top-median-bottom) to shareholders, who would then be able to see whether people are getting proportionate rewards, and whether (for example) a company’s low-pay models are likely to create externalities that impact the wider economy in which those shareholders are also invested. Speaking of shareholders, it would be nice if they were required to report how they vote so that their clients (i.e. us, through our pension funds etc) can hold them accountable.

    In response to Mister Jabberwock:
    You say that “being CEO of a council …is just (simplistically) a matter of spending money”.
    Are you confusing council CEOs with Paris Hilton?

  18. Mike Thomas

    Oh I agree.

    Let’s take a look at the giant Ponzi scheme of public-sector pensions first though. When the public sector converts them to money-purchase schemes then perhaps you might have a point on the private sector pay.

    However, that would also be once they are accountable to the population who pays their salaries through taxation on their salaries.

    As for Chief Exec’s, in private firms, they are answerable to shareholders for their performance.

    Who are LA & Union Chief Exec’s answerable too?

  19. Gareth Jones

    //tinyurl.com/4ttywqv We cannot address public sector pay without addressing private sector pay

  20. reded

    To light a fire without matches you need the right environment.

    How can private business thrive if the streets are not cleaned, if criminals are not caught, if workers are not educated and healed, if borders are not defended.

    It’s time private business and the pirates that grow from it start to learn what happens when the real workers down tools.

  21. Stephen W

    Both sides in this argument have a point.

    Running a company is different to working in the Public Sector. Running a private company does have greater risk. Private companies must attract voluntary customers by offering a better service than others. Public bodies have legally guaranteed incomes and budgets.

    That is why a pay ratio of 20:1 is fair in the public sector but far too restrictive in the private sector.

    But that is not to say that the government cannot have a role in promoting more even pay in the private sector. Legislating to set private pay is wrong and invasive. What private shareholders are willing to pay is their business.

    But it is reasonable for the government to take private pay ratios into account when handing out public contracts. The government could make pay ratios and levels part of the judging criteria for handing out public contracts. This could be both in terms of high to low pay ratios and in terms of whether companies pay a living wage. A more sensible 50:1 ratio could apply and if the company goes outside that they could be penalised in terms of being judged for public contracts.

    50:1 is a lot more than 20:1 but if it is really true that FTSE 100 top pay is more than 100 times higher than average pay, and therefore presumably more like 200 times higher than lowest pay, this would still be a massive shift in culture.

    Of course private companies would not change their pay structures over-night or possibly at all but it would give a powerful ‘nudge’ in the direction of more equitible pay within the private sector, since the public sector hands out contracts worth well more than £100 billion a year.

    A further mechanism for promoting more equitable pay could be a mechanism such that pay above a 50:1 ratio tied to the minimum wage would have to be legally treated as removed from profits rather than as wages (from revenue pre-calculation of profits). This would mean it would have to be taxed through corporation tax and then income tax. This would act as a deterrent to ridiculous pay awards and like with the previous proposal through a ‘nudge’ rather than heavy-handed legal restraints. It would also have the benefit that any money paid out through this method would be subject to an effective marginal rate of 64% rather than 50%, thus netting more for the treasury.

  22. Spir.Sotiropoulou

    RT @leftfootfwd: We cannot address public sector pay without addressing private sector pay //bit.ly/ghqkDM

  23. Daniel Pitt

    We cannot address public sector pay without addressing private sector pay //bit.ly/fV59RY #ConDemNation

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