March 15, 2011 11:11 pm

Fair pay review

Hutton report rejects some bad ideas but keeps others

Executive salaries, J.K. Galbraith once said, are not so much a market award for achievement, as a warm personal gesture by the executives to themselves. Small wonder that they earn 88 times the wage of average workers. The situation in the public sector is far less extreme. But in some parts, the salaries of top employees are pulling away from those of lower earners. Will Hutton was asked by the government to suggest remedies for this phenomenon, and on Tuesday published his findings. Some of them make sense, but not all.

One of the proposals Mr Hutton evaluated was a pay cap limiting the highest earner in an organisation to a certain multiple, say 20, of the salary of the lowest earner. He rightly dismissed it. Although appealing in principle, a multiple would make the salary of a top earner dependent on that of the lowest earner in an organisation. This could easily be gamed by outsourcing low-paid jobs. Mr Hutton has also wisely rejected the populist idea of linking the pay of public sector chiefs to the nominal pay of the prime minister as arbitrary.

Without a wage cap, some other means of moderating the remuneration of public sector bosses is necessary. Mr Hutton has two suggestions, one good and one bad.

The good one is transparency. Mr Hutton proposes that public sector bodies not only publish top to median pay multiples each year, but also explain how wages reflect individual performance. At the least, such a move would allow a more informed debate on public sector pay. It might also slow wage inflation at the top end.

Mr Hutton’s second proposal is less convincing. In order to avoid rewarding failure, he recommends that a proportion of a high earner’s salary be made dependent on their meeting certain targets. The same amount again could be awarded on top as a bonus for exceptional performance. The flaw in this plan is that is difficult to select meaningful performance targets for workers in the public sector, where success is not measured merely in pounds and pence.

In defence of his idea, Mr Hutton argues that performance-related pay may attract more high-fliers to the public sector. But it is hard to believe that performance-related pay will achieve this. In any case, what the public sector really needs is to draw in talented people attracted to public service.

Public sector pay restraint must not drive out the able. Fairness matters; but so does a functioning bureaucracy. This is something that the government should bear in mind.

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