Public Sector Pay Policy – Dead Man Walking?

By Mark Childs, Total Reward Solutions

An increasing number of rather troublesome cracks are appearing in public sector pay policy. Although the current public sector pay system is not yet broken, some very well established models are quite obviously deconstructing into a more fragmented approach. The momentum is such that uncertainties are confined to the pace of change and how orderly or chaotic the break-up will prove to be.

In a week when the TUC conference is expressing its dissatisfaction with public sector pay and pensions’ practice it is tempting to assume that mounting employee relations pressure will be the key factor in nudging public sector pay models towards breaking point. However, while the high profile sabre-rattling of the trades unions catches the popular attention, there are three more significant factors which will likely drive change faster and deeper.

Local Initiatives

There is a growing willingness among public sector employers to consider taking the initiative rather than waiting for pay review bodies or central government to provide the lead. This is most noticeable in the NHS, where Agenda for Change is being shown up as inflexible and unresponsive to local needs. It follows that a growing number of local employers are evaluating the possibility of departing from with this national framework. It may only require a few high profile trailblazers to champion the cause for those who have been nurturing the idea of breaking to discover the confidence to do so.

With a strong collective mindset, public sector employers are not naturally disposed to going it alone, so it is reasonable to believe that change is more likely to be precipitated by local employers breaking away from Agenda for Change together, as evidenced by the NHS South-West employers’ consortium. This said, with 10,000 NHS Community staff recently transferring out of core NHS into social enterprises, new reward and more market based models will prove irresistible responses to falling revenue for those who wish to maintain service levels to their client groups.

Outside of the NHS there is also evidence of non-departmental public bodies and executive agencies seeking to innovate in their use of non-consolidated pay, translating these practices into bonus or even long-term incentive plans.

Central Government

There is now an unstoppable momentum carrying potentially large sections of the public sector towards market facing pay. In other words, to set their pay rates primarily by reference to local market conditions rather than by internal comparison, typically via a points-factor job evaluation system. The Regional Policy of successive Governments of the past 30 years has been to move Government departments out of London and the South-East and other relatively low unemployment areas to more economically disadvantaged regions. The effect has been that the labour markets of some regions of the UK are disproportionately dominated by public sector employers, with national pay rates leaving these employees earning a significant premium compared to local private sector employment. At the other extreme, national pay rates make it hard to attract staff in more buoyant labour markets or local labour market hot spots.

How this will pan out is uncertain and central government has the potential to get this wrong if they promote regional pay rather than local market pay. However, even if an imperfect model is rolled out it will put traditional job evaluation thinking under strain, heighten the risk of additional equal pay claims and create a more level playing field between public and private sector employment earnings. For those private sector employers who think this development is irrelevant to them, there may be some surprises in local hot spots if public sector rates rise to make them competitive with local private sector norms.
Pay Differentials 

Continuing pay restraint, fuelled by national austerity is slowly but steadily eroding public sector pay differentials. A pressure point within the public sector is the differential between lower paid workers who continue to receive modest cost of living increases and first line supervisors whose earnings are just above the pay cap. Though the compression looks modest, the compound effect over time will leave the relationship between pay scales looking distorted.

Turning to external considerations, the age old pattern of public sector workers enjoying a lower rate of earnings growth during a period of Conservative Government is reasserting itself and the gap between higher paid public sector workers and private sector workers is closing. This said, at the total reward level lower paid public sector employment often still carries a significant pay premium outside of London and the South-East, due to the impact of local pay rates, pension and holiday provision.

These forces are only going to intensify over the next 12 – 24 months and they will have a significant impact of charity and similar third sector organisations which track public sector pay policy, while private sector employers in some locations will experience unwelcome surprises. It follows that few of us can afford to close our eyes to the cracks in the system and we should all probably hope for an orderly exit from the current public sector pay model.

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  • The Civil Service pay remit says 'Cabinet Office would co-ordinate and assist Secretaries of State in exploring how local, market-facing pay can be introduced in civil service departments.'

    The Civil Service Reform Paper makes one mention of the issue at page 29 of a 31 page document:

    'In the 2011 autumn Statement the Chancellor announced that there was a case for considering how public sector pay could better reflect local labour markets. The independent Pay Review Bodies are currently considering the case for greater local pay flexibility in the wider public sector but nothing has yet been decided. There will be no change unless there is strong evidence to support it and a rational case for proceeding.'

    If I was a betting man I'd bet my home on local market facing pay   not being imlemented in the Civil Service.

  • Anonymous

    This is an excellent summary of the real and current pressures facing public sector pay together with the dilemma for public sector organisations in ensuring the long term relevance and viability of their pay practices.

    Working for a large public sector body that has had local pay determination for many years and therefore some degree of control over pay, I feel we are much better equipped than many other organisations to step up to the challenges outlined by Mark in this article. However, the extent of the CSR cuts, the Winsor and Hutton reviews and public sector pay freezes make the challenge of addressing the apparent cracks in the public sector pay model no mean feat. Wish us well.