Hutton drops PM’s public sector pay cap plan

David Cameron’s plan to cap the pay of senior public sector executives at 20 times the salary of their lowest paid employee has been scrapped by Will Hutton, the government’s independent reviewer of “fair pay” in the public sector.

Instead, Mr Hutton proposes a new “pay for performance” deal that would see senior executives earn their full salary only if they achieve a basic level of good performance. This would see them having to “earn back” 10-15 per cent of basic pay.

Pay ratios between top earners and the average, or median, pay in public service organisations should, however, be published, Mr Hutton said, to enable comparison across the public sector, and the same requirement should be placed on all quoted, private sector companies.

Greater transparency over pay in both the public and private sector, along with explanations as to why people are paid what they are, may help restrain the top pay “arms race” in both sectors, Mr Hutton said in his final report on the issue published today .

The review was commissioned by the prime minister to explore the idea of a maximum 20:1 pay ratio, with Mr Cameron saying very high differentials were “wrong”.

But in spite of concluding in his interim report last November that such a ratio might be appropriate, Mr Hutton said applying it would be “illogical” – not least because it would catch fewer than 70 top public servants, and because it “could become a target to which people aspire”.

Instead, the former head of the Work Foundation said senior public executives should be paid according to the weight of the job they do and their performance.

To achieve that, he recommended a “radical” new regime in which senior executives – and in time more middle ranking ones – would have to “earn back” a portion of their basic pay by meeting agreed objectives annually. Once they had done so, they could be eligible for a matching bonus for exceptional performance. The move, he said, could initially affect a couple of thousand senior employees but in time “tens of thousands”.

By having more of their pay at risk, the change would encourage more “go-getters” to join the public service, he said.

Mr Hutton that the way performance was measured needed more development. But he rejected the argument that it is too difficult to do. “I don’t buy that,” he said.

This “huge advance in transparency and public accountability” should be applied to the private sector, he insisted.

All public limited companies should be required to publish their pay multiples each year, reflecting in the UK a move Mr Hutton said was about to be introduced into the US by the Securities and Exchange Commission, the financial regulator.

The ratio should be between median, rather than bottom pay, and the top, he said, to avoid distortions where an organisation outsourced all its lowest-paid jobs.

The CBI employer’s organisation reacted warily to the idea, saying that shareholders, not government should set pay.

Asked about the government’s initial reaction to his recommendations, Mr Hutton said that although he had “laid the wreath” on the idea of a fixed 20:1 ratio, “there were not many tears running down people’s faces” in either the chancellor’s or the prime minister’s offices.

He believed, however, that George Osborne, the chancellor, “is up for” the sort of “fairness” framework that he is proposing.

But Jonathan Baume, general secretary of the top civil servants’ union the FDA, said the idea of “earn-back” pay was “ill-conceived” and would be “demotivating” given that there would be no bonuses paid in the current climate.

It potentially created conflicts with ministers, he said, who ultimately decided priorities and spending.