A Tale of Two Huttons: public sector executives must demonstrate value to earn “due desserts”

Nik Darlington 1.50pm

Note to HM Government: it is careless to commission two reports on public sector remuneration conditions by two men called Hutton and release them within three working days of each other. When the TUC welcomes the “Hutton review”, and you think they are referring to pension reforms, it can impel dangerous reactions such as choking on your toast.

Former Labour minister Lord Hutton published his review into public sector pensions last week, which Sara commented on yesterday and Giles covered this morning. Today Will Hutton, economist and editor-in-chief of The Observer, has revealed his recommendations for public sector pay, in a report entitled ‘Hutton Review of Fair Pay in the public sector’.

'Independent' reviews can often be anything but indepedent but these two authors cannot be branded as stooges. Lord Hutton was Business Secretary under Gordon Brown and Work & Pensions Secretary under Tony Blair. He therefore came to the task with ready-to-hand knowledge and experience of the complicated pensions terrain. The only charge of impartiality that can be levelled at him, considering the cosmetic change of tack by Labour under Ed Miliband, is his Blairite pedigree. Blair's supporters in the party make no secret of their unease at Miliband minor's leadership, and Lord Hutton's suggested pension reforms, “doing as Labour would have to have done”, tie the Opposition's hands somewhat.

Will Hutton, equally, is no friend of the Tories. As recently as October, he was attacking George Osborne’s spending review, saying “history will see these cuts as one of the great acts of political folly.” Hence the significance of his report being so helpful to the Government is even greater.

It is a long document (132 pages) and overflowing with public sectorisms that make you want to reach for the Glennfiddich mid-morning. Even so, it contains some sound recommendations.

Transparency measures such as the Fair Pay Code, annual Fair Pay Reports, and disclosure and explanation of full executive remuneration (including accessible data), are old ideas in newer form but they are sensible and instantly implementable with little attendant cost or effort.

Hutton says he was asked by the Government to consider a cap on executive pay at no higher than twenty times that of the organisation’s lowest paid employees - a “public sector pay multiple”. He dismisses this as “inoperable”, much, I imagine, to the Government’s relief. David Cameron floated the notion as part of an attractively progressive Guardian headline during last year’s election campaign, but salary capping runs contrary to Tory principles of freedom and choice (which Hutton acknowledges).

The nub of Hutton’s whole argument lies in his conception of “fairness as due dessert”. Appealing to the time-honoured British sense of fair play, this “new settlement” will introduce fairness and accountability to public sector pay.

"The package of recommendations must be taken as a whole, but if implemented together should reassure the public that it is not being taken for a ride, while creating a pay and performance framework that over time should drive more innovative and creative behaviour. This framework will offer flexibility and fairness both to senior executives and the tax-paying public. There should be the flexibility to respond to market conditions in particular parts of the public sector without having to refer to Ministers, but equally senior executives need the protection of a fair pay framework to give them a robust defence when and if they come unjustifiably under attack."

Hutton’s underriding and measurable concept of fairness is “value”. Pay should be performance related. If you don’t provide good value and outcomes, you lose your pay.

"A proportion of executives’ base pay should be earned back subject to meeting performance objectives; where they are not met, that money will be lost. However, where managers surpass objectives, they will be eligible for additional pay. This will create a framework that, unlike parts of the private sector where executives only have degrees of upside and no downside to their pay, guarantees that executives have skin in the game. Most public servants do good, day-to-day work, but if they do not, this system will send a powerful message to the public that there are meaningful consequences for underperformance."

So for example, last month I wrote about Gerald Jones, Wandsworth Borough Council’s chief executive, whose £299,925 salary is the highest in the country. His council is also one of the most efficient in the country, saving locals thousands of pounds in council tax and business rates, making Mr Jones eminently more valuable than counterparts elsewhere.

There are difficulties. From my days as a management consultant, I know how slippery it can be to quantify “value”. It is the business world’s Holy Grail. It is the underlying driver of consumption and can be - if calculated correctly - a key to performance and productivity. Quantifying executives’ value and establishing fairness by due desserts, and I asume that is the ultimate intention, will not be easy.

Also, Janet Daley is right to caution that the perfomance-related aspect of the recommendations can be liable to council’s arranging their own goalposts. Furthermore, Will Hutton cannot surely believe that he can get all private suppliers to the public sector to sign up to his Fair Pay Code too?

All things considered, it is the second positive set of suggestions for public sector reform in the space of a few days. Parts of both Huttons’ reports could go straight into George Osborne’s Budget next week, others will need a lot more gestation and consultation.

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