I am taking some annual leave in August and so am delighted to have my first guest post!
Public Sector Bonuses – gone forever?
Bonuses for public servants are a hot issue – so hot that they appear to have fallen out of favour not only with the Scottish Government, but also at UK level where the Coalition Government has ordered a review, and clamped down on the senior civil service bonus “pot”. Are public sector bonuses destined for the bin and is there any prospect of informed debate about the pros and cons?
As Will Hutton notes in his Review of Fair Pay in the Public Sector published last year, part of the reason for this is that “public sector managers have been caught up in the backlash to the remarkable growth of the earnings of the top 1 per cent over the last thirty or forty years and in particular in the last ten. Bank bail-outs with scarcely checked bonuses have dramatised these concerns…[but]…only one pound of every hundred pounds earned by the top one per cent of earners is earned by public sector employees.”
The Scottish Government’s public sector pay policy for senior appointments in 2012-13, which applies to Chief Executives of Non-Departmental Public Bodies (quangos in media-speak) and Public Corporations as well as NHS Scotland top managers, specifically suspends “access to non-consolidated pay” in 2012-13, ie bonuses for exceptional performance in 2011-12. The pay policy for other staff in public bodies and for the Scottish Government’s own civil servants similarly suspends all access to non-consolidated pay, either as bonuses or as pay for staff on their range maximum.
This may be a reasonable enough response to austerity and is consistent with the general freeze on public sector pay, but “the policy expectation…that any bonus arrangement in a Chief Executive’s contract will be removed when an appropriate opportunity arises (on new appointment or following a review)” goes further and suggests a more fundamental rejection of the bonus concept.
Would the end of bonuses for public servants in Scotland cause problems in terms of employee motivation and performance? The answer to this is by no means clear. Bonuses for public servants arrived with performance-related pay in the civil service reform agenda in the 1980s and 1990s, before spreading out to some, but by no means all, other parts of the public sector. They became part of the “New Public Management”, inspired by the proposition that public services could be made more efficient by adopting commercial practices and disciplines, and by importing private sector managers to run them.
Performance related pay, unconstrained by the limitations of public sector pay scales, and the availability of bonuses, were seen by Ministers of the day as necessary to recruit such managers. They were also key tools in the kit of “reforms” needed to make all public servants work harder and focus on results; but there are a number of still unresolved problems with this in the public sector. First, “performance” needs to be assessed in relation to a relatively small number of well-defined measures and targets which may not reflect the complexity of the work, and are often difficult to determine without the financial and shareholder value-related metrics available to the private sector. Second, individual achievement may partly depend on the performance of others, in other organisations, pursuing other priorities. Third, performance assessment needs rigorous individual performance appraisal by managers who in the public service frequently have neither the appetite nor aptitude for the difficult conversations with staff that implies. Fourth, in the absence of such rigour, performance-related pay drives up the wage bill as well as future pension costs.
The classic response by Governments to the last problem is to restrict the amount of “consolidated” (ie pensionable) performance pay, and to put more emphasis on non-consolidated one-off bonuses. In the civil service this approach has been accompanied by central control over the proportion of the overall paybill which can be devoted to the bonus element. The consequence tends to be consolidated pay increases in which the difference between the reward for exceptional as opposed to acceptable performance is marginal, and bonuses whose modest size is more likely to promote cynicism than enhance motivation. As Hutton notes in his review, in the UK public sector non-consolidated bonuses are parsimonious compared with other OECD countries.
There are therefore probably few public servants who would shed tears over the disappearance of non-consolidated bonuses, if they were to be replaced by reward arrangements that offered the opportunity to improve pensionable pay. This is however not likely to happen, as one-off bonuses help Governments to bear down on future pension costs – always part of the rationale, and even more important now than previously. Indeed the pressure to keep the public sector pension “burden” of the future under control implies more, not less, emphasis on bonuses as a reward, with a larger proportion of individuals’ remuneration in the form of one-off non-pensionable payments.
It would be premature therefore to conclude that performance pay and bonuses in the public sector are destined for the dustbin of history. Hutton considers that there are compelling reasons why performance pay for senior staff should not be abandoned, on the grounds that there should be differentiation in financial rewards for the good and poor performer. However, he also considers that there is a much stronger case for linking pay to performance at the senior levels of public organisations, as opposed to the rest of the workforce, a view with which many public sector managers and staff would probably agree.
They may be less inclined to agree with his suggestion that performance pay systems might be reconfigured to include an element of base pay which was “at risk”, to be “earned back” through good performance, though his advocacy of team based incentives, and a sharing of rewards from productivity gains, would receive some support. Not that the latter suggestion is new: thirteen years ago the then Labour Government committed to “looking for new ways of rewarding organisation performance and success-sharing, for example …. by linking pay, bonuses or other rewards to the achievement of performance or efficiency improvements”.
No doubt the long search will be resumed at some point. But two important underlying questions remain unanswered: first, are public servants really motivated by money? And second, if so, is there any prospect of any system of performance pay for public servants being well enough funded to make it a real motivator and – in that event – of its being acceptable to the public? The answer to the first is that it is highly doubtful, and to the second, a resounding “no” on both counts. So perhaps the controversy over bonuses is less a hot issue than just so much hot air.
 Hutton Review of Fair Pay in the public sector: Final Report, March 2011
 Public Sector Pay Policy for staff pay remits 2012-13, The Scottish Government, September 2011
 Public Sector Pay Policy for senior appointments 2012-13, The Scottish Government, September 2011
 Modernising Government, CM4310, March 1999