Public sector bosses’ pay will keep on rising

Can we just get something straight?

There is no such thing as the public sector labour market. There’s just the labour market.

Unless a job is specific to the public sector, the pool from which organisations must recruit is the same, regardless of which sector they are in.

Inevitably, therefore, pay increases in the wider labour market exert a pull on pay levels in the public sector. Given the massive increases in executive pay in private companies over the past decade it would be surprising if public sector salaries did not rise too. There was a time when public servants were a different breed from private sector managers – they were expected to be motivated by public service alone and not to seek the high rewards of their private sector counterparts. That is still true to an extent but there is now a far greater interchange of executives between public and private sectors.

Many private sector managers cross over to the public sector.  Some are motivated by the idea of public service, others by an opportunity to broaden their CVs. Often, they are prepared to make the move for no pay increase or even for a small pay reduction. It is unlikely, however, that many will switch sectors for a massive drop in salary. Altruism and a belief in public service only goes so far.

Therefore, if George Osborne is serious about attracting private sector expertise into the public sector, he will have to offer salary levels above the public sector norm. Many local authorities, NHS trusts and government agencies have already discovered this grim reality, which is why senior public sector pay packages have risen.

Public sector pay levels are still well below those in the private sector. As Duncan Brown of the Institute for Employment Studies points out, in this somewhat sarcastic article, “senior public sector leadership roles are still only paid about half of their private sector equivalents”. But the more private sector people the public sector recruits, the higher the salaries it will need to pay.

Which makes all the fuss about public sector bosses earning more than the Prime Minister start to look a bit silly. People become Prime Minister for a whole raft of reasons. The salary is unlikely to be one of them. Publishing salaries over £150,000 may be a good idea in itself – transparency, public accountability and all that – but the ruling that any salary above £150,000 will require Treasury approval seems to imply that paying public servants any more is somehow wrong.

But, for people managing large and complex organisations, £150,000 is now the going rate in the public sector and many private sector execs would not even get out of bed for that amount. Given that the public sector will need to be reformed beyond recognition over the next four years, it is inevitable that it will need to attract some new leaders and that many of them will come from the private sector. Upward pressure on public sector salaries will only get worse.

If some people’s salaries are obscenely high, this is not a public sector problem, it’s an executive pay problem. If executive pay shoots up again then public sector managers’ salaries will rise too, albeit probably not at the same rate. Capping the pay of public sector managers and attracting more private sector expertise are contradictory aims. Any organisation attempting to do both will fail.

It is likely that, four years from now, we will have a lot fewer senior public sector managers. Those that survive, though, will need to be excellent leaders and will therefore be paid accordingly. There won’t be as many of them but you can bet that they’ll be paid a lot more than the Prime Minister.

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7 Responses to Public sector bosses’ pay will keep on rising

  1. Pingback: Public sector bosses’ pay will keep on rising - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Bina says:

    OOOOhhh no, for once I completely disagree with you. There is a very good reason why it is hard to attract talent into the public sector when that talent does not share the ‘values’ behind public service. Even for those ‘public spirited’ individuals within the public sector it can be mightily challenging to work under the stupidity of some political decisions. It’s this constantly changing political landscape that makes it doubly difficult to work in the public sector – without ‘commitment’ it is absolutely not worth the pain – no matter how large the salary and (artificially created) bonus. Unfortunately, too many ignorant policies have been implemented within the service sector that pretend that people are mere components in an assembly line. When the real value givers in the service sector can be allowed to get on with what they are supposed to be doing and organise it in the best way – we’ll all soon see that we have the best people already. Huge pay rises for the ‘managers’ are not necessary.

  3. MarkyMark says:

    I’m afraid I’m going to have to disagree as well – for two reasons.

    First, if public sector managers are going to oversea cuts, layoffs, restructurings and pay freezes then they have to lead from the front. You can’t have your salary go up by 10-20%+ or whatever and then turn around and say that pay freezes and loss of perks and cuts are necessary for everyone else due to budgetary constraints. You just can’t. Although the additional pay for the bosses may be small in terms of absolute pounds it is pure poison in terms of organizational moral and a bosses ability to effect change.

    Secondly, I think that bosses in the private sector have over the years become increasingly overpaid. This is particularly evident in the financial sector but also occurs in other industries. John Bogle refers to this as the ‘principal-agency’ problem. The traditional understanding is that company officers and managers are agents of the company (with the company and by extension its shareholders being the principal) and that the managers act in the best interests of the company. What has happened increasingly over the years is that managers act not in the long term interests of the company but in their own short term best interests. The recession has exposed that in the case of banks and many companies that the profits of the companies have been paid out to the managers in the form of outsized salary and bonus packages. When the crunch has come and it is clear that these companies are not as profitable as once thought this is little comfort to shareholders who have seen their equity wiped out. Private sectors salaries need to come down to better reflect the actual value managers add. This is difficult in an environment where the shareholders as owners are too diffuse to effect change and managers are in it for themselves.

  4. MarkyMark says:

    oops – oversee

  5. Rick says:

    @MarkyMark – I thought ‘oversea’ was an oblique reference to offshoring. 😉

    I can’t see the pay freeze holding for long and I think some ingenious HR directors will get around it in the usual way by creating new roles. I agree that people need to lead from the front and I completely agree that senior salaries are too high in the private sector. Alas, despite all the talk of shareholder activism, the evidence seems to show that, now the economy is picking up, salaries are on the rise again.

    I don’t think public sector senior manager pay will ever get to private sector levels but I can’t see how a general rise in managerial salaries can do anything but exert a pull on public sector salaries too.

    @Bina – I’m sure it’s not the first time you’ve disagreed with me.

    For the very reasons you give, the frustration of working in th public sector is likely to see more senior people throwing in the towel if they can double their salaries by moving elsewhere. I’m also not convinced by the argument, which I have heard on a number of occasions, that the public sector has all the knowledge and skills it needs to reform itself. I’m not saying that there are not good people in the public sector; there are and I have met many of them. But, with a few exceptions, the sector has shown itself incapable of initiating major reform from within. To make the massive change needed, some people will need to be brought in from outside, and that will push up the salary levels.

  6. Bina says:

    I’ll respond to your last point Ricky, it is because the Public Sector is subject to the interference of political decision making and global political decisions that structural and positive change is so hard to maintain. The experts in the sector are positively prevented from making the structural changes that would sort out the problems – the regulations are absolutely crippling. Positive change can happen when the sector is released from these ties. A case in point is the regeneration of London’s Docklands – this came about because the area was freed from all the constraints applied by Town Planning regulation. To say that London Docklands was regenerated solely by private sector investment is to overlook what the regulatory environment was. Same principle applies to a lot of the services provided by the public sector.

  7. I think you’re right Rick. Ultimately it won’t be possible to break the relationship between senior salaries in the public and private sectors. Historically you tend to get periods of retrenchment in the pubic sector, followed by catch-up exercises, so public sector pay proceeds in fits and starts, but in the end, as you say, there is one labour market and one pool of available talent.

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