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The pressure of public scrutiny is increasing on senior, well-paid individuals in all areas of work after a Freedom of Information request. Concerns have arisen that senior public servants have been abusing their position by working in ways that are “tax efficient” and thereby inappropriate.

At a time when high pay in the private sector has been a matter of concern, it was pretty obvious that arrangements for senior positions in the public sector would soon come under increased scrutiny and calls for transparency.

With news emerging the Student Loan Company’s chief executive, Ed Lester had his salary paid through a personal service company (a legal framework with no direct employment relationship and tax advantages), the Coalition Government’s focus on reducing tax avoidance has been called into question.

Personal service companies are generally accepted as perfectly legal and legitimate mechanisms for many independent contractors to work with client organisations. This arrangement can be entirely legitimate and suit both parties, particularly where the contractor works independently with multiple clients and where permanent or direct employment is not appropriate. Such companies can be an effective way for contractors to work and have certain tax advantages.

Tax legislation generally prevents such arrangements being abused as, where HMRC takes the view the working relationship is one where direct employment is the “real” situation, the contractor would normally be liable for PAYE and National Insurance in the normal way.

This is managed through the application of IR35, introduced in 2000 with the aim of eliminating inappropriate tax avoidance behaviour and generate tax revenue.

Since the introduction of IR35, tax lawyers have expressed concern that HMRC have been “bashing” truly independent contractors and entrepreneurs with this legislation to raise revenue rather than tackling real tax evaders.

Initially at least, there has been no suggestion the particular case in question has been put in place illegally and no details about the tax treatment of the arrangement have been disclosed, though it has been suggested “tax authorities” had approved it. The SLC has apparently defended the arrangement, producing figures suggesting it was saving the organisation around £88k over two years by avoiding head hunters fees, and tax and national insurance contributions. Commentator have highlighted potential financial benefits of between £25k and £40k for Mr Lester.

Across the public sector, Attractor is aware there is, generally, a strong focus on ensuring appropriate treatment of employment and contractor relationships. Perhaps this is why the judgements made in this case have been called into question. From the details published, it seems the arrangement had been approved at a pretty high level and there may be some suspicion that pressure from politicians had swayed the decision.

With increased focus on the issue, Danny Alexander, the Chief Secretary to the Treasury has ordered an investigation to see if the practice is widespread across government. It will be interesting to see the results of the investigation and it’s certain there will be increased effort to ensure the tax treatment for all senior appointments has been as “clean” as possible.

This might require a change to payment mechanisms and employment relationships or, more simply, a quiet word in the ear of the taxman.

At the end of January 2012, a political storm over high pay in banking, especially in the bailed out and “publicly owned” banks hit the headlines once again. With the Chairman of RBS having already declined his bonus, valued at £1.4m, Stephen Hester the Chief Executive, then came under pressure to waive his bonus, valued at just short of £1m.

With politicians calling for a vote in Parliament, Mr Hester concluded the position was untenable and agreed to waive the payment. Politicians will be very pleased to have influenced some powerful people into “seeing sense”, but it’s unclear where the political influence game might stop.

On the Today programme Robert Peston, the BBC’s Business Editor, highlighted the point that RBS had “come under pressure” to make a decision on bonus payments before most of their competitors … and walked into a trap by doing so.

It seems sensible for politicians to concentrate of shaping the legal and political frameworks within which the business leaders, entrepreneurs and workers can operate independently. This point was made, carefully, by William Haig talking on Radio 4 when he stressed that government ministers should avoid making decisions on individual cases and trying to run banking businesses.

Attractor has said before that pay generally reflects market pressures – people earn what their skills are worth in the labour market. This effects us all!

It’s no wonder the wide variations in earnings between those at the top and bottom of society become exceedingly painful when times are hard and it’s understandable that people consider it invidious to see others pocketing “windfall gains”. But there is a difference between something being undeserved and “not understood”. The fact that we don’t understand how decisions are reached about pay and performance issues in a particular industry does not necessarily mean those decisions are arbitrary or unfair. Read the rest of this entry →

Photo: rracy o; Flickr

The high level of earnings by senior people in private sector companies has hit the headlines once more with a series of outcries in response to news revealed in the Income Data Services report that FTSE 100 Directors experienced an increase of 49% in earnings over the last year.

While the increase in basic pay averaged only 3.2%, this figure was dwarfed by an average bonus payments increase of 23%, from £737,624 in 2010 to £906,044 in 2011 plus  the “crystallised? value of long term incentive plans (LTIP) and share options cashed-in during the year.

Overall IDS have revealed that -

• CEOs received an average increase of 43.5% (average earnings £3,855,172)
• Finance directors received an average increase of 34.1% (average earnings £2,001,515)
• All other directors received an average increase of 66.5% (average earnings £2,260,033)

In the press release from IDS themselves, the report’s editor, Steve Tatton reflected on the sensitivity of his findings, saying

Overall comment has been pretty negative however with very predictable condemnation from unions. Polly Toynbee has drawn attention to the diverging experience of those at the top and bottom of the earnings range, with the government considering reductions in employment rights and broader protections. Comment on these proposals has been quite dismissive. Attractor has asked the question if employees are Too Hard to Sack and would generally suggest that problems with terminating under-performing people are related to management culture and policy rather than employment law.

So what has happened in 2011? Read the rest of this entry →

With the government implementing a two year pay-freeze to support its “austerity programme” and planning changes to public sector pensions, concerns arise that health-care organisations might be effected by widespread industrial action for the first time since the 1980s.

Unions reluctantly accepted the necessity of the two year pay freeze though are now campaigning for a significant increase for staff when that deal expires in April 2013. Unions are strongly resisting other changes to employment terms, especially the reduction n the value of pensions.

NHS budgets are under more pressure than they have experienced for a decade and employers are contemplating ways to change the Agenda for Change pay systems which were established nationally in 2004.

By the end of 2010, the organisation NHS Employers had proposed a national enabling framework for local pay negotiations which would have allowed local agreement for freezing pay increments in return for a commitment on preventing compulsory redundancies. At that time, with strong indications from the unions that they would reject local pay negotiations, the initiative seemed to stall.

NHS Employers Chief Executive Dean Royles said recently “It is essential that local employers have meaningful discussions with local trade unions and staff about the workforce implications of the financial challenges for their organisations.”

Through 2011, planning conversations have continued on the management side and NHS Employers has recently reflected employers concerns, suggesting current national pay structures place unsustainable pressures on the NHS pay bill and proposing greater flexibility and local pay deals as potential solutions. Foundation Trusts, with their freedom to negotiate local employment terms with their staff, may follow Southend University Hospitals NHS Trust in starting to change the way pay works. The Nursing Times recently highlighted a number of cases where organisations were describing these tentative steps towards devolution -

• Mid Cheshire Hospitals has been quoted as  “working alongside other providers at a regional level to consider options to negotiate alternative terms and conditions” on areas including incremental progression and sick pay,
• University Hospital of South Manchester is said to be considering “proposals for changes to terms and conditions outside of the national framework”,
• Central Manchester University Hospitals’ attempt to withhold pay increments from employees with poor attendance is being challenged by unions,
• Birmingham and Solihull Mental Health was completing an options appraisal “regarding a move away from Agenda for Change” by 2014,
• Royal Surrey County Hospital polled staff to see if they would accept changes to employment terms in exchange for fewer job losses.

Employers understand the NHS employment market is a complex one and history has taught them that competitive behaviour between neighbouring Trusts has been damaging in the past. At present it seems NHS bodies will share thoughts, ideas and opportunities for change, seeking to move “in concert” on a menu of options and proposals to be discussed with local staff.

An even more dynamic strategy seems to be emerging with Calderstones Partnership NHS Foundation Trust working to set up a spin-out social enterprise subsidiary which will employ staff on non-NHS terms and conditions. With new services being established through this vehicle, services might be run at lower cost, though transferring existing services will pose more challenges with both TUPE and equal pay requirements to be met.

So what change could and should be made in NHS organisation’s pay strategy?

Read the rest of this entry →

Photo: pajp, Flickr

The Hay Group recently considered the issues subject to current public debate surrounding pay and reward. In it’s article, Hay looked at a number of areas where it considered there were myths surrounding the public sector

Myth One – The public sector is overpaid

Overall Hay drew clear and balanced conclusions. Highlighting the impact of the recent recession on earnings in the private sector, it suggested -

• public sector salaries were broadly competitive with the private sector up to experienced professional/middle manager though the public sector provides better benefits - pensions in particular
• at more senior levels, the private sector’s use of annual bonuses, car and health benefits and long term incentives outweighs the value of public sector pensions.

Myth Two – Nobody in the public sector should be paid more than the Prime Minister

Turning attention to the current favourite comparison on public sector pay, Attractor’s favourite quote from the Hay report is -

“Politicians, the media and the public should be less worried about unhelpful comparisons and more concerned with ensuring we get real performance in return for our money.”

Hay point out that pay levels relate to the market for any particular job, a matter that Attractor has commented on before. Pay should be set in a way designed to recruit, retain and motivate people with the required skills and experience.

In relation to the issue of comparing salaries to that of the Prime Minister, Hay highlight the PM has, in addition to his salary, two pension schemes, use of two houses and chauffeur driven cars while in the post plus access to extensive earnings opportunities afterwards. They comment the role of Prime Minister is based on “a political career” with “a constrained recruitment pool” – a very distinct market from other public servants – which makes the comparison “irrelevant”.

Read the rest of this entry →

The Coalition Government has expressed a clear objective of creating “a mixed contractor economy” that will deliver greater competitiveness across the public sector. Their aim is to drive efficiency and value for money and stimulate innovation in how public services are provided.

In certain respects, the Coalition Government is reducing the “safety measures” that helped public servants make a comfortable landing when they left employment of the government and its agencies.

As part of its overall aim of encouraging public sector organisations to be “spun out” into mutuals, co-operatives, charities and social enterprises, steps are also being taken to reduce the obligations of these organisations to match existing public sector employment terms.

In December 2010 the Government announced its withdrawal of the Code of Practice in Workforce Matters in Public Sector Service Contracts. This Code of Practice required organisations which had accepted employees transferred from the public sector to offer new recruits employment terms which were no less favourable than those of transferred employees.

With this restriction removed, organisations providing public services will no longer be perpetually locked into employment arrangements inherited from the public sector. The indications are that the similar provisions covering Local Authorities are likely to be similarly withdrawn and this will also impact on NHS bodies and their partner organisations.

Unsurprisingly, the CBI welcomes this development, though, no doubt it will raise serious concerns with public sector unions – who saw this code as a major achievement in their discussions with the Labour Government. There is no suggestion the government plans to reduce employment rights under TUPE legislation and employees who have benefited from earlier arrangements remain “protected” – but future transfers will face fewer constraints on their ability to take on services previously delivered by public service organisations.

In March 2011 the Government then announced new consultation on the requirement to provide broadly comparable pensions for staff transferring from the public sector into new employers. It repeated the finding of the Independent Public Services Pensions Commission that the existing public sector pension structures and the requirements to provide broadly comparable pensions were acting as a barrier to non-public service providers.

It’s clear now the Government does recognise the need to address pensions matters discussed by Attractor previously in its aim to encourage innovation and a mixed economy. It is also obvious it prefers not to remove the barriers by opening up public sector pension schemes to new organisations – a signal that will not be lost on public servants or their union representatives.

Photo: bcmom, Flickr

At the end of 2010, Attractor commented on early reports of proposals to introduce a freeze on incremental pay progression for NHS employees in return for a guarantee of no compulory redundancies. Details of the offer for a “National Enabling Framework on Pay” were well covered in the the Guardian and the NHS Employers site provides access to many documents which describe the detail, context and background for the offer.

In his regular blog, Gerry Bolger comments on the fact many of the leaders who have publicly supported the offer are earning more than the Prime Minister, highlighting the cost of the senior managers in relation to clinical teams.

While many will agree, the comparison with the Prime Minister’s pay follows an avenue laid by the Conservative Party in their bashing of public sector organisations throughout 2010. In fact the comparison is not particularly valid and Attractor has made earlier comments on this matter.

An organisation facing greater than average financial constraints and where QIPP efforts are slow in materialising will face stronger pressures to agree a pay freeze than one where there is a successful and positive programme of reform and service reorganisation. Where there is a sound case for significant reorganisation, agreeing such a deal might tie the hands of management and prevent sensible reform – and result in more people losing out than necessary.

Looking at the offer in details – there seem to be more challenges and problems than there are signficant benefits for employees. Read the rest of this entry →

Photo: rracy o, Flickr

The bonus pot for bankers has returned to the normal level according to the Centre for Economics and Business Research (CEBR) at £7bn (compared to £11bn in 2009).

For 2010, the government will take a larger slice of the bonus cake than bankers after the introduction of a 50% tax rate for income over £150,000.

With the backdrop of the current crisis, it is “bankers” who are facing the heaviest criticism from the public, not public servants or senior managers.

With people feeling they are being made to pay for the mistakes of bankers, it is the high bonuses being paid there which annoys people most.

Attractor has examined the issues surrounding high earnings in particular sectors before. In the past we have looked at the pay of top managers, performance pay for public servants, bonuses in public services, top public servants and public services generally. So what about bankers? Read the rest of this entry →

Central Manchester University Hospitals Trust recently announced it’s plans to withhold incremental pay increases for employees who have taken more than 18 days off sick or had four separate sick absences. This move forms part of it’s plans to save £120m by 2014 while protecting services.

The Trust was keen to point out that the new policy, being introduced from 1 October 2010, would be discretionary and would be applied in a manner that would not be discriminatory for people with long-term illnesses or those with disabilities.

NHS organisations are clearly looking for ways to save money but potential savings from implementing this policy would probably be “vanishingly small”.

UNISON officials reflected there was nothing in existing contracts providing that staff could be denied increments on the basis of absence and expressed the view NHS Trusts acting in this way would be in breach of the existing employment contracts and confirmed it would take legal action on behalf of affected staff.

In an article in Personnel Today, a legal adviser from Beachcrofts said the legality of the scheme would depend on what the staff contracts of employment say and how flexible the Trust is in applying the policy. He suggested it was unlikely the employment contracts were so prescriptive as to set out a mechanism for deciding upon pay rises and considered employers would normally have flexibility to consider a variety of factors when looking at pay rises.

So what is the position and how will the organisation fare if it proceeds without a local negotiated agreement? Read the rest of this entry →