Is public sector executive pay a red herring?

More bluster from Eric Pickles yesterday as he claimed that council chief executives’ pay had risen by 78 percent between 2002 and 2007. He was soon called out on this by, among others, the Guardian and the Local Government Chronicle. The figure he quoted was, in fact, the increase in pay for FTSE 250 CEOs. The corresponding number for council bosses was 34 percent.

Public sector managers’ pay might make for a great media story, or at least it would if ministers could get their sums right, but as a factor influencing the level of public spending it is relatively insignificant. I was going to dig out some figures on this but Patrick Butler has already done it.

Let’s pretend all councils could cut the pay of their chief executives by 50 percent. That would save 0.05 percent of employee expenditure and only 0.35 percent of the savings local government needs to make in the next year alone.

Or try this. Let’s pretend councils could cut their entire senior management pay bill by 25 percent. That would give them a whopping 2.4 percent of one-year’s savings bill.

It’s a similar story in the NHS. As I have said before, management costs in the NHS make up a tiny proportion of its overall running costs. A report by the Commons Heath Committee last month showed that management costs in the NHS have reduced from 5.1 percent of total costs in 1996-97 to 3 percent in 2008-09. All types of NHS organisation have seen the proportion of their spending on management costs fall. Whatever has fuelled the increase in NHS expenditure over the past decade, management costs are clearly not to blame.

And 3 percent of running costs is very low. The NHS needs to save 4 percent per year. If it could sack all its managers it wouldn’t even make its first year’s target.

In the grand scheme of things, then, the level of executive pay is not a significant contributor to overall public spending. As I explained here, most of the public sector’s costs are embedded in its frontline services. Cutting management and back-office costs only saves relatively small amounts. In some circumstances, management and back office cuts could even pile more hidden costs onto the frontline. 

Senior executive pay is another of those magic bullets that commentators seize on as a simple solution to a complex problem. It has the added advantage of feeding on a bit of envy and it therefore makes great headlines. All good fodder for ranting politicians and boorish journalists.

But beating up local government managers about their pay will not help to significantly reduce public spending and it will almost certainly discourage talented people from outside the public sector from taking jobs in local authorities and the NHS. Starting a row about managers’ pay is a very silly diversion from the task in hand but it is much easier than trying to understand the complexity involved in reducing public spending. Which is why we will probably hear a lot more bluster and spurious statistics from Mr Pickles and others in his camp.

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13 Responses to Is public sector executive pay a red herring?

  1. Pingback: Is public sector executive pay a red herring? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

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  3. Rick, absolutely, a viewpoint that needs to be put. I have big issues with bankers who get paid millions for taking a gamble with other peoples money.

    But I don’t have an issue with a local authority chief executive who gets paid £200,000 for managing 5,000 people and a bugdet of several hundred million.

  4. willy says:

    I don’t think the logic holds here (yours or Pickle’s). We could go to a council, take the top-paid individual, and give him a 1000% raise, so his/her pay is now ten times what it was. This would have a negligible impact on the overall budget, but it’s still impossible to justify.

  5. Jim says:

    I thought the whole point of a lot of this was that we’re all in it together. The 50% tax band has been sold on the basis that even if it doesn’t raise much extra dosh, it sends message. So why not a few headline reductions in council CEO pay too? Pour encourager les taxpayers?

    If £140K is considered plenty for the person who runs the country, I can see no reason why whoever runs a local authority deserves any more. When you price in the pension pots these people are accumulating as well, their pay is well in excess of their headline figure.

    • briansj3 says:

      Exactly. Long term cost of employment and pension suitably amortised would be a great deal more than salary. Salaries still outrageous.

  6. david says:

    Ignoring who said what, comparisons on pay are rarely useful. However, scrutiny on value and appropriateness of pay are, especially so when it’s a non-revenue generating public service.

    In this case, the amount of saving is not the issue it’s the culture and attitude you want to engender in public services. It’s culture and attitude that will drive real long term efficiency and value and will always be more effective than the axe of central government.

    BTW the bankers who get paid millions for actually “gambling” get their money from what they make for their clients. If they fail they are out. It’s the senior executives who risk the whole franchise (incl savers deposits) that merit scrutiny. Again it’s culture and attitude which is at fault rather than the amount of pay….

  7. Nick says:

    “management costs in the NHS have reduced from 5.1 percent of total costs in 1996-97 to 3 percent in 2008-09”

    But net NHS expenditure has risen from 32 billion in 1996/97 to 68 billion in 2007/08 (both 1996/97 prices) so management costs have increased by 22% in real terms.

    source: Written answer in the Lords. http://www.theyworkforyou.com/wrans/?id=2009-07-16a.258.4

  8. Rick says:

    Willy – no-one is suggesting giving people 1000% pay rises. I don’t understand your point.

    Jim – the PM’s salary is irrelevant. PM is a completely different job and people don’t do it for the money; they do it for the power and glory. That’s why they often have high-earning spouses (Thatcher, Blair) or private wealth (Cameron). If you want good people to run councils you have to pay the going rate. I find this suggestion that public servants should work for the love of it rather quaint. they already get paid less than their private sector counterparts anyway. You can only expect the public sector ethos to go so far.

    David – you serious about the bankers? There are dozens of failed bankers still at their desks. They took their banks down, we bailed them out and many of them are still in the same jobs. Even the ones that did get fired got huge payoffs.

    Nick – and your point is…? If resources increase there is going to be an increase in the numbers of people managing that resource. It hasn’t gone up by the same amounts so, if anything, NHS managers are getting more efficient.

    • Nick says:

      Rick,

      You ask what my point is. Well, the point was to demonstrate that management costs have actually increased dramatically, as a counter to your implication that they have decreased. You could argue there is greater effeciency,based on a reduction in percentage paid in management costs, or just as easily that mangers have let costs spiral out of control, and management costs just haven’t risen as quickly as total costs. Given most (all?) measures of public sector productivity [which I recognise is hard to measure accurately] show productivity has reduced since 2000 which do you think it is?

  9. Some interesting ideas. I guess people who have responsible jobs ought to be paid for that level of responsibility but what about those whose jobs are not at all responsible – or perhaps they are and I just don’t understand how.
    There was an interview on radio 4 last week between a senior exec at a football team who had been scathing about fans who watched football at pubs who were using european satellite broadcasting facilities ie not SKy
    He seemed to think fans were responsible for the lack of funds at his football club – and that the pubs who broadcast these games were even more to blame.
    At a time when pubs are closing all over the country or trying to make a living, and fans are presumably finding their pockets squeezed he didn’t once consider that footballers may be paid slightly above the odds for playing a game!
    How can the salaries of footballers (and possibly other celebrities) be justified?
    and if they can’t then presumably nobody elses can be justified on rational terms either.

  10. Adam says:

    There are two points being conflated here. The first is that local authority executive pay is a small proportion of total expenditure and so changing it doesn’t make a significant difference.

    However, that doesn’t invalidate the second point, which is whether 200k is too much to pay a chief executive. Allied to this is the issue, also seen in spades in the private sector, that it’s very easy for remuneration committees to splash a little extra cash to make sure they get their man, but also then very easy for their peers to justify large salary increases to the rest of the cohort because ‘that’s what the market rate is’.

    There seems to be a number of causes of this, including the small difference to total expenditure mentioned above, and, I suspect, a little bit of vanity by remuneration committees “My council is more important than your council- look how much we’re paying the boss”. There’s also the ridiculous situation where the new Chief Executive is chosen and *then* the salary is negotiated – the Council has very little bargaining power at this stage as both sides know the cost of re-running the process.

    What’s also interesting is that for a Council the process of procuring a Chief Executive is very different to the process of procuring everything else. Most procurements of this magnitude (200k per annum plus, for an indefinite number of years) involve long tender documents specifying minimum criteria and an extensive selection process. If there is more than one supplier that is able to deliver, then the cheapest bid is chosen.

    I wonder whether this would work for Chief Executives – they should state how much they’re prepared to do the job for, and the cheapest one that meets the criteria wins.

  11. Alan P says:

    I love the idea of competitive bidding for Chief Executives – treat it as just another purchasing item.

    As to the original argument that the inflated sums of the C-Team salary are the square root of nothing in the Scheme Of Things, and thus OK, that is the long term refrain of the private sector and usually goes hand-in-hand with the War For Talent argument that to get The Best you must pay large sums.

    That this is wrong can be proven statistically by measuring company peformance vs Executive reward, every time I have see such a comparison it is mildly negative.

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