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Bridging the gap between public and private sector pay: the gloomy facts pointing to a need for change

Posted by David Smith

David Smith

In around 2010 if someone asked us how public sector pay compared to pay rates in the general market we’d have said they were about the same, if not slightly higher. Ask us now and we’ll tell you that at the lower levels, generally speaking, public sector salaries are around 6% off the pace and at the very senior levels this could be as much as 25%. A worrying trend for the sector with no sign that this gap will be closing anytime soon.

As many reading this will know, public sector pay has been subject to considerable scrutiny in recent years. Since the Comprehensive Spending Review of 2010 there’s been a sharp focus on senior pay rates from politicians and the media, and pay awards have been low or non-existent for many. True, the sector has struggled to keep a lid on pay bill increases because of the prevalence of automatic incremental progression systems but this hasn’t been enough to keep pace with a private sector that, in many areas, has started to turn the corner and find its feet again.

It’s not just about pay restraint in one sector and barmy 3% (yes 3%!!) increases elsewhere though. The public sector has, for a while, been filling some positions at a lower rate than that earned by the previous incumbent. This is seen most clearly at senior levels, particularly in a sector like local government where it’s common to see Chief Executive roles filled for significantly less.

So this is the data, what’s the impact? Well for the last few years the main challenges appeared to be centred around staff engagement and industrial relations – the effect on recruitment and retention was less clearly seen. It appears that this is now changing too. In 2011, CIPD data suggested that just 25% of public sector organisations had difficulty retaining specialist staff. This figure had risen to 60% by 2013. More Councils for instance are now telling us that they’re losing their specialists to the private sector. Roles in engineering, IT infrastructure, architecture, project management, and planning have all been hard to keep. In some cases these are people that the council has been developing for years, people that are often central to the future aims and objectives of that organisation.

How can the sector protect itself from these attacks? Firstly it needs to understand the scale of the challenge. It’s time to open the can of worms and have a look at what types of worms are in there! We’ve established that the private sector pays more, but there are also some significant differences in the way that the pay system works, and the composition of the full package itself. At senior levels, base pay is only around 50% of the story. The rest of the value to the employee comes from annual (performance-related) bonus, car allowances, private medical plan, longer-term incentive schemes and so on. When comparing yourself to the private sector it would be unwise to only consider base pay amounts. The private sector generally has the flexibility to pay more too. Are you benchmarking against the median when they’re poaching your best people with upper quartile offers?

So how do you begin to fix the solution – to recruit and retain great people? There is certainly a question of aligning your pay rates more appropriately. Clearly, pay rates are not going to be hiked up anytime soon and organisations are not in a position to start throwing money at the challenge. However, we need to acknowledge that there are different ‘markets’ and market forces at play here. There will be pressures in some areas and less in others. Many public sector organisations use market supplements to reflect where these pressures exist but this might not be the only fix. You could consider introducing some flexibility so that there are entirely different pay scales for different groups of jobs, or job families. This may also enable you to introduce different career progression routes or career pathways for these roles too.

The next solution may be around acknowledging and communicating what it is that makes your organisation a great place to work. Some of this may even by financial if you can justify that, for instance, the pay and pension rates are broadly competitive in some specific areas. It may also be about communicating some of the intangible reasons why someone is better off in this sector – opportunity to work on great projects? More responsibility? Work/life balance? Work closer to home? I’m afraid this might be another can of worms that needs opening but the results of this kind of staff engagement exercise may surprise you.

I don’t want to underestimate the enormity of the challenge here. This is tricky and HR professionals in the sector continue to face and up-hill struggle. The fact remains however that the future of these organisations depends on their ability to attract, recruit and retain the key people they need. I hope organisations in the public sector choose to take a strategic view of reward, to deal with the current challenges but to drive them forward in the future too.


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