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In defence of public sector bonuses: Greater use of performance pay would help protect public purse

Ministers and senior civil servants need to find the courage to make greater use of performance related pay and bonuses in the public sector, not less, if they want to maximise value for the taxpayer while also driving through substantial public service reform

Ministers and senior civil servants need to find the courage to make greater use of performance related pay and bonuses in the public sector, not less, if they want to maximise value for the taxpayer while also driving through substantial public service reform.  This is one of the key recommendations of a new report from the Chartered Institute of Personnel and Development (CIPD) into the urgent need for pay and pensions reform in the public sector.

The report, Coping with Less: Pay and pensions in the public sector, highlights statistics showing that expectations of how employees’ pay should be determined varies dramatically between public and private sector workers:

  • Only a third (36%) of public sector employees believe they should be paid based on how well they personally perform, compared to three fifths (60%) of their private sector counterparts

  • Only 6% of public sector workers see the performance of their organisation as an appropriate factor in determining their pay, compared to a third (35%) of private sector workers

  • More than half of public sector workers highlight the cost of living as one of their preferred determinants of their pay (the most popular choice for this group), compared to a third (33%) in the private sector

  • A quarter (26%) of public sector workers point to a trade union negotiated deal as one of their preferred determinants of their pay, compared to just 4% in the private sector.

The report, which forms part of the CIPD’s Building Productive Public Sector Workplaces series, also:

  • Calls for urgent reform of public sector pensions, to address analysis in the report which reveals that for every £1 contributed by public sector employees outside of local government to their pensions, the taxpayer contributes £3.39

  • Urges more regional flexibility in public sector pay to take into account variations in labour market conditions and cost of living in different parts of the country

  • Reiterates the CIPD’s consistent call for a freeze in the overall public sector pay bill, allowing more flexibility for employers to address specific recruitment challenges and reward good performance than a crude freeze on all individual salaries.

Charles Cotton, expert Reward Adviser at the CIPD, said:

“Given the state of our public finances, and with CIPD analysis now forecasting 725,000 public sector job cuts in the next five years, pay restraint in the public sector is vital.  The public sector workforce is going to have to find ways of emulating the kind of restraint the private sector workforce demonstrated during the recession to have any chance at all of minimising the inevitable job losses to come.  However, by allowing emotive headlines about ‘snouts in the trough’ to ensure any kind of performance related pay in the public sector becomes morally unacceptable, ministers are simply conceding that poor performance and excellent performance should, fundamentally, be rewarded equally.

“A refusal to make use of bonuses in the public sector removes one of the most powerful tools the new government has to drive up standards and deliver its many and stretching ambitions for public service reform and improvement.  Conversely, the status quo is an approach to pay that does little to support meritocracy, and may foster mediocrity.  By linking pay far more closely to performance, ministers could find that they are able to get far more bang for the taxpayer buck.  Pay is far better used as a carrot than it is as a stick.

“The frequent reliance on uniform, union negotiated pay deals, and length of service as a determinant of individual pay progression has ensured that there is a disconnect in the minds of many public sector workers between their performance and the pay they receive.  We need to move beyond this to an approach in which individual and collective performance and achievement of results becomes a significant determinant of how much taxpayers’ cash public sector workers take home.”

On public sector pensions, Charles Cotton added:

“The need for public sector pensions reform is well recognised.  But the revelation that taxpayers are paying £3.39 for every £1 public sector workers contribute to their pensions highlights the urgency with which the issue needs to be tackled.

“There can be no overnight solution to this problem but, as our report argues, short-term action is required to share the cost and risk of public sector pensions more equitably between employers and employees.  In the near future, a fundamental examination of whether the value of public sector pensions is sufficiently well-understood or valued to act as a magnet for talent or driver of performance in the public sector is necessary.  And, in the longer term, a shift away from a pay as you go approach towards a far more flexible approach to public sector pensions, more comparable to private sector best practice, will be unavoidable as ministers seek to ensure equity and value for taxpayers.”