Why a competitive civil service needs to make pay a priority

The civil service's failure to keep pace with the private sector on pay will only get worse if there's no change in policy. Whitehall must recognise the scale of the problem

By Peter Smith & Graham Atkins

01 Jun 2015

The civil service faces further cuts on top of the 70,000-strong reduction in numbers since 2010. There will also, according to the Conservative manifesto, be reform “to make it more dynamic and streamlined”. It may seem odd under these circumstances to highlight pay as a concern, particularly as higher salaries could mean even fewer posts. However, civil service pay is now so uncompetitive that action is urgent.

The problem is well documented. Civil service salaries lag behind the private sector at all levels but for the lower grades other package elements – particularly the pension – provide a counterbalance. At higher executive officer (HEO) level, the typical offer from a government department or agency falls about 10% behind the median total remuneration level in the wider market.

By senior manager and expert professional level, Grades 7 and 6, the civil service package is worth only about two thirds of that available elsewhere. The pension may still be better, but it is applied to a lower salary than would be the case in the private sector, which also offers more substantial bonuses, car allowances and other benefits. The senior civil service package is so far off the wider market that taking a job in government can only be a career and lifestyle choice – certainly not a financially motivated one.

This gap has been evident for some time, but it has widened in the past five years. Without a change in policy it will get worse. Private sector pay is rising at 3.5% a year and there is increasing use of variable pay on top of salary. If civil service pay rises are capped and there are continuing restrictions on the use of bonuses, there will be a further steady decline in the relative value of remuneration in the sector.

The risks this creates are obvious: it will be harder to attract the best graduates; the number of talented leavers – already high – will increase; and it will become even more difficult than it is at the moment to recruit people into critical and specialist roles where market competition is high.

One major effect has already been the subject of parliamentary scrutiny and media comment: the widespread use of interims and contractors. These appointments are expensive, though necessary if the salary policy prevents recruitment. They make the organisation reliant on temporary labour, and therefore less resilient. They are also hard to justify financially. A contractor at Grade 6 level could easily cost £200,000 a year. The median private sector package value (including bonus and benefits as well as salary) is about two thirds of that, so it would be possible to pay a rate which is genuinely competitive in the wider market and still save £65,000 a year on the cost of a contractor.

Ministers will not be keen to give the nod to major increases in civil service pay – that would be seen, in Sir Humphrey’s phrase, as “a courageous decision”. But they do have to recognise the need for better remuneration if they want to arrest the decline and create a ‘dynamic and streamlined’ service.

The first step is to recognise the nature and scale of the problem. Pay, recruitment and retention are high priorities for civil service chief executive John Manzoni, and that is a start.

Secondly, there has to be a review of the civil service workforce, looking at what the core functions are and how they can be resourced. This is a prerequisite for any effective cuts as well as for talent management, but it was unfortunately absent from considerations in the past five years.

Third, there should be a change in pay policy delegations for all agencies and public bodies outside the Whitehall core, moving to controls based on overall spending rather than on average salaries or on the pay bill. That would enable organisations to replace contractors with substantive employees, and it would give them the option of having a smaller number of higher paid people.

Fourth, there should be much more flexibility in the pay on offer at Grades 7 and 6 - and probably at the early stages of the senior civil service too. As part of this, there should be a policy reversal on performance related pay, to create room to reward success. The new minister for the Cabinet Office, Matt Hancock, has expressed an interest in this already, although he will also want to see much more effective performance management as well.

None of this is easy, but these issues cannot be ignored for another five years. We all want the country to be well run by a high-performing civil service. Better pay is critical if we are to achieve this.