Yesterday Will Hutton published the initial results of the enquiry he has been conducting on the government’s behalf into pay differentials and levels of remuneration for senior managers within the public sector. His central recommendation is that there should be a maximum pay ratio of no more than 20 to 1 between the highest and lowest paid in public sector organisations. (This is hardly a surprise as this was precisely the option he was asked to consider by the government when his enquiry was set up).

This suggestion is not going to address any problem of excessive public sector pay (which is not a real problem anyway) and if put into effect will create perverse incentives and lead to systematic gaming of the rules, with damaging effects, particularly for low paid public sector workers. More seriously, the creation of Hutton’s enquiry and the general approach of his report and his public statements reflect a widespread way of thinking about pay and rewards in both the public and private sectors that is deeply misguided. This outlook also means that where there is a real problem it is misdiagnosed.

Will Hutton’s enquiry was triggered by a series of reports that a number of senior public sector executives earned more than the Prime Minister. This was apparently a shocking scandal. Personally I fail to see what is shocking about this – there is no shortage of applicants for the position of Prime Minister, including even a few who are qualified, and it is not clear that it is a more demanding position than for example being the chief executive of a major unitary authority. More to the point, it is not clear that the qualities and attributes required for high political office are as scarce as those needed to successfully administer and deliver services through a large organisation, whether public or private.

One thing required is to put the alleged problem into perspective. Throughout the public sector most pay differentials are well within the 20 to 1 ratio recommended by Hutton in any case. Only 4,000 senior public sector managers are within the top one per cent of earners and most of these are in highly demanding and challenging positions. More to the point, the qualities required to perform those roles effectively are not that common and so in order to attract candidates of the right calibre the appropriate level of rewards has to be offered (which do not have to be entirely pecuniary of course).  If a rigid pay differential of the kind suggested were to be imposed on the public sector the most likely outcome would be for the system to be gamed by the parties involved. A likely outcome would be for the lowest paid work to be either eliminated or outsourced so that the pay at the top could stay where it is and still conform to the 20 to 1 ratio. I doubt this is what Will Hutton wants or had in mind.

However, it is clear from the public discussion that has followed the publication of Will Hutton’s recommendations that neither he nor many of the commentariat are concerned by high public sector pay per se. Rather they are concerned with pay levels and rewards in general. The underlying idea, not very well expressed, is that pay and rewards for work should not be determined simply by the play of labour markets. Rather there is a persistent notion that a job of a particular kind has an appropriate rate of reward that is natural and therefore fair. Hence attempts to establish by discussion what the “right” rate is for a head teacher, or senior company manager, or top flight civil servant. The point is that there is no “right” or “natural” or “fair” rate of pay for any role, whether a Premiership footballer or a local authority chief executive. Nor is it the case that there is some standard by which we can establish that one kind of worth is inherently worth more than another. The appropriate rate of pay for a job is the one that will attract enough of the right kind of applicants for the position in terms of the qualities and abilities needed to do the tasks effectively. This will be determined by a whole range of factors but “fairness” is not one of them. We should think of remunerations as costs required to get something done rather than as rewards for doing it.

Is there a problem then of excessive reward in the private or public sector or must we just take whatever levels of pay we have as what is needed? There may indeed be a problem but it’s important to be clear what that is. Research by the Institute of Directors shows that over the last two years pay for senior executives in small and medium sized public companies and in large privately owned ones has gone down in both real and nominal terms. It has continued to increase in large public companies. To the extent that we do have a problem, of pay in excess of what is needed to attract the right candidates and of failure or mediocre performance being rewarded, it is clearly a principal-agent problem, reflecting the lack of control over their senior employees by the shareholders of large public companies (or their public sector counterparts such as local authority councillors). Proposals such as Will Hutton’s will not address this and may even make it worse by increasing the scope for cronyism beyond what it already is.