COMMITTEE FOR FINANCE AND PERSONNEL

COMMITTEE MOTIONS

Senior Civil Service Pay and Bonuses

Whitehall Review of Senior Civil Service Pay Arrangements

FROM: NORMAN IRWIN

DATE: 23 March 2009

Summary

Business Area : Central Personnel Group, Department of Finance and Personnel.

Issue: DFP officials have been invited to provide briefing on the implications for the Northern Ireland Civil Service of the recent Whitehall review of remuneration arrangements for Senior Civil Servants. This paper outlines the main issues identified in Sir David Normington’s report “Senior Civil Service Workforce and Reward Strategy” and how the report’s findings relate to the Senior Civil Service in Northern Ireland.

Restrictions: None.

Action Required: For information.

Introduction

1. The Assembly’s Committee for Finance and Personnel has been considering the arrangements for pay awards to the Senior Civil Service (SCS) in the Northern Ireland Civil Service (NICS) in the context of a wider examination of public sector performance. This examination has coincided with the publication of a report by a Steering Group set up in Whitehall under the leadership of Sir David Normington, Permanent Secretary at the Home Office, to review the Senior Civil Service workforce and reward strategy. In correspondence with the Committee, the Minister for Finance and Personnel has indicated that it will be important to analyse the outcome of that review, along with the Cabinet Office’s response to it, in considering whether any changes should be made to the SCS pay arrangements in Northern Ireland and, if so, how they should be progressed.
2. This submission provides information on:

(i) the current arrangements for SCS pay in the NICS; the proposals emerging from the report of the Steering Group on the Senior Civil Service

(ii) Workforce and Reward Strategy (the Normington Review); and

(iii) a preliminary analysis of the key issues arising from the Normington Review for the NICS.

The Current SCS Pay System

3. The current pay system for the SCS in the NICS was introduced in 2002, with the agreement of the Executive, in line with arrangements for the SCS throughout the United Kingdom. The rationale for applying those arrangements to the NICS stems from the fact that the essential role of SCS staff in supporting Ministers in policy and delivery, and in leading the work of the civil service, is broadly similar in Whitehall and in the devolved administrations. This is reflected in common competency and learning and development frameworks, and for the most part in a common grading structure and performance management system.
4. The foundation of the SCS pay system comprises three broad pay bands with associated grade levels at Permanent Secretary, Grade 3 (Deputy Secretary) and Grade 5 (Assistant Secretary). The NICS generally shadows the pay arrangements for SCS staff in the Home Civil Service, applying the parameters set down in the recommendations of the independent Senior Salaries Review Body (SSRB) and taking account of any supplementary guidance from the Cabinet Office, when developing the annual SCS pay strategy for approval by the Minister for Finance and Personnel. In practice this means adopting the overall cost envelope set by the SSRB and the Cabinet Office for increases to the SCS pay bill for the purposes of consolidated base pay and the percentage of the pay bill which should be used for non-consolidated performance related variable pay (bonuses). Other more detailed variables, such as the range of base pay and non-consolidated bonus awards and the percentage of staff to be allocated to each category, are taken locally.
5. SCS pay is performance based. For the base pay award, members are assessed on their performance in relation to their peers and are typically allocated to one of three pay tranches as a result of this assessment - Tranche 1: top 25% of staff; Tranche 2: middle 65-70% of staff; Tranche 3: bottom 5%-10% of staff. In 2008 the increases in base pay applied to each tranche were 2.75%, 2.5% and 1% respectively. 2009 will be the second year of a recommended three year pay award which has an indicative 7% growth in the pay bill for the period 2008 -2011. The bonus pot recommended by the SSRB was set at 8.6% of the pay bill for the 2008 pay award, with the SSRB recommending that this should increase to 10% by 2011. However the Cabinet Office, in its evidence to the SSRB for 2009, has recommended that this 8.6% level should be frozen for the remainder of the pay round.
6. Non-consolidated bonus awards were introduced into the SCS reward arrangements in 2002, when the level stood at 2.3% of the SCS pay bill. Since then it has increased year on year to the current value of 8.6% of the total SCS pay bill. A range of bonus levels are agreed as part of the annual pay strategy. All SCS staff are eligible for a non-consolidated bonus award, although in the past the SSRB has recommended limits on the proportion of SCS members expected to receive an award. In 2008 approximately 75% of members at Assistant Secretary and Deputy Secretary levels received a non-consolidated bonus award. Non-consolidated bonus awards are intended to be the primary reward for in year performance against individuals’ personal objectives and are paid at the end of the year for performance in the previous year. They are distinct from base pay increases which reflect growth in longer-term potential.
7. Pay recommendations for staff at Assistant Secretary level are made at departmental pay conferences chaired by the Permanent Secretary and including those Deputy Secretaries with line manager responsibility. The Permanent Secretary is responsible for final decisions and for pay awards for Deputy Secretaries in his/her department.
   The NICS SCS Pay Committee, comprising the Permanent Secretaries of all NICS departments and chaired by the DFP Permanent Secretary, provides a moderation role to ensure a consistent approach to Assistant Secretary and Deputy Secretary pay across all departments. The Head of the NICS considers the annual pay awards for Permanent Secretaries with the assistance of an independent Permanent Secretary Remuneration Committee.

The Normington Review

8. The terms of reference for the review of the Senior Civil Service Workforce and Reward Strategy, led by Sir David Normington, were:

To provide a long term direction to Senior Civil Service (SCS) workforce and reward strategy having regard to the needs of the Civil Service, observations made by the Senior Salaries Review Body (SSRB) in recent reports and public sector pay policy.

9. Four principles underpinned the review:

(i) No recommendations were to be made about the absolute level of pay and reward in the SCS. Such matters will continue to be the preserve of the SSRB;

(ii) Work was to proceed on the basis that there would be no proposals to increase the size of the SCS pay bill;

(iii) Not all the proposals must be implemented immediately, rather it is important that the SCS reward and workforce strategy has a long term direction of travel with a clear purpose going forward. There is scope to phase proposed changes to minimise transition costs; and

(iv) The importance of getting pay and reward for the SCS right. Senior Civil Servants often do work of national importance, are responsible for huge amounts of taxpayers’ money and for policy and services that affect almost every citizen. Arguably, there is a need for SCS to be among the best leaders and professionals in the country. A workforce and reward strategy is required that ensures the Civil Service recruits, develops and retains the best, now and in the future.

10. The key problems with the current system of reward indentified in the report include:

(i) A lack of clarity in what the current system rewards; what drives the incentives and why, or their long term implications;

(ii) The relatively weak link between job weight and pay; and

(iii) The tendency for some individuals to be paid more as a result of how they were recruited, rather than what they actually do.

11. The latter observation is based on a growing trend in the Home Civil Service to recruit candidates for senior posts from the external market at much higher starting salaries than the relevant grade minimum to meet requirements for specific skills and expertise. The need to pay salaries higher than the grade minimum when recruiting externally is also becoming apparent in the NICS, albeit to a lesser extent.
12. The report noted that since the restructuring of pay bands in 2001 and the introduction of non-consolidated variable pay, there has been a deliberate shift to reward people with one-off performance bonuses by increasing the variable performance pay pot from 4% in 2003 to 8.6% in 2008, and a consequent slowing down in the growth of consolidated pay.
13. In all the report made fifteen recommendations, which are listed in a synopsis of the report at Annex A.

14. The report’s recommendations focus on two main areas:

(i) the development of a long term Workforce Strategy for the Civil Service, that will inform future policies for recruitment, retention and development both for the Civil Service and Senior Civil Service; and

(ii) a Pay and Reward Strategy for the Senior Civil Service that will both derive from and contribute to the overall Workforce Strategy.

It is the latter of these two elements that is examined in this paper. The report focuses on the system of reward for the SCS, not the quantum of such reward. The proposed new reward model for SCS is based on five components and demonstrated in the diagram at Figure 1. It represents a radically new model which will differentiate the pay of individual members of the SCS. In addition to the base payscale for each grade, there will be potentially three further variable elements to determine an individual’s remuneration.

Fig 1.

NI Implications

15. This section of the paper briefly assesses the impact of the key recommendations of the Normington Review in respect of pay and reward for the NICS, taking account of local circumstances. Although there are many commonalities in the role and structure of SCS in the NICS and the Home Civil Service, there are some distinctions between the circumstances in Northern Ireland and in Great Britain which are worth noting.
16. There is a significant difference between the median salaries actually paid in the NICS and in the Home Civil Service, with the NICS median being lower by 16%, 14% and 25% at each of the Assistant Secretary, Deputy Secretary and Permanent Secretary grades respectively (it should be noted that the Permanent Secretary payband in the NICS equates to the Director General payband in the Home Civil Service). This in effect represents an element of regional pay, reflecting the outworking of the labour markets in Northern Ireland and Great Britain (see Table 1 below).
17. There has been a divergence between the NICS and the Home Civil Service in trends in numbers of SCS staff. The Normington report notes that in Great Britain membership of the Senior Civil Service has grown sharply over the last 12 years from 3050 in 1996 to 4212 in 2008 (38% increase). In contrast the size of the SCS in the NICS has remained static at 209 between 1996 and 2008. NI SCS figures peaked at 237 in 2005 but have since fallen back again as a consequence of the “Fit for Purpose” efficiency targets set in Budget 2004.
18. The Job Evaluation for Senior Posts (JESP) methodology underpins the grade structure in the SCS in both GB and NI, providing a consistent basis for comparing the relative value of jobs within and across Departments. Analytical job evaluation systems are a sound basis on which to determine work of equal value, ensuring that people with particular levels of responsibility broadly have access to salaries within the same range. In the NICS the JESP scores and associated pay bands for Permanent Secretaries are lower in comparison with Whitehall Departments, reflecting the difference in scale of the posts held. One of the key proposals of the Normington review is the development of a new job evaluation system to support a new reward system and in particular the application of additional responsibility premia within that system.
19. Turning to the specifics of the five elements of the proposed new pay model, the implications for the SCS in the NICS are highlighted below.
20. Base Pay. The proposal is that all members of the SCS should be put onto a basic five point payscale for the grade and that base pay will progress incrementally over a period of five years based on the satisfactory acquisition and application of new skills and reflecting the steep learning curve for new entrants into an SCS role. To reflect the commonality of these core skills, the base pay for a fully competent and experienced member of the SCS would be a spot rate. So far as the NICS is concerned, this would be seen as a positive step towards addressing some of the problems identified in the current NICS SCS pay system:

(i) The extreme length of the current pay scales which serve to set unrealistic expectations to both SCS members and observers of the actual or potential earnings level. No member of the SCS in the NICS comes close, or is likely to come close, to reaching the maximum of the relevant pay bands, which serve to create misleading impressions of what the majority of the SCS actually earn. A five point pay scale would also be less vulnerable in respect of age discrimination legislation.

(ii) Overlapping pay scales both within the SCS pay bands and with the non-SCS Grade 6 pay band resulting in members in a particular grade potentially earning less than staff in the grade below for whom they have management responsibility;

(iii) The absence of what could be identified as a ‘pay norm’ for the role in each of the pay bands; and

(iv) Poor pay progression, particularly in pay band 1, resulting from the absence of pay progression steps and the limited scope for consolidated base pay increases afforded by the pay remit. A clear five point payscale would place pay progression on a firm footing.

21. Table 1 below demonstrates the length of the SCS pay bands and overlaps. In the comparison with the Home Civil Service, there is a significant difference in the median salaries actually paid in the NICS. In fact the median salary for pay band 1 is less than the maximum of the lower Grade 6 pay scale (£62,407). The maximum of the grade 6 scale is achieved through annual pay progression steps in the non SCS pay system. A member of the SCS could have responsibility for a more junior staff member with a higher salary than his/her own.

TABLE 1

Northern Ireland SCS			Whitehall Departments SCS
Grade/Title	JESP Score	Pay Band /Median Salary	Grade/Title	JESP Score	Pay Band / Median Salary
Pay Band 1 Assistant Secretary	7 - 12	£57,300 - £116,000 £61,153	Pay Band 1 Deputy Director	7 -12	£57,300 - £116,000 £72,596
Pay Band 2 Deputy Secretary	13 -17	£81,600 - £160,000 £86,971	Pay Band 2 Director	13-18	£81,600 - £160,000 £101,068
Pay Band 3 Permanent Secretary	18 -22	£98,059 - £205,000 £100,962	Pay Band 3 Director General	19-22	£99,960 - £205,000 £135,262
HOCS		£139,740 - £273,250	Permanent Secretary		£139,740 - £273,250

22. Additional Payment for Job Weight Content and Responsibility. This will be determined through a new job evaluation system, limited to a number of fixed cash levels providing a stronger link between the pay level and job weight or responsibility carried. Linking pay more explicitly and directly to job weight would be a positive step in mitigating equal pay vulnerabilities, compared with the current system which in theory permits different individuals in jobs with similar “JESP” scores to receive significantly different levels of remuneration along very long paybands. However, it would require a significant one-off effort to establish a job weight and associated payment for each SCS post. Staff would need to be trained locally to apply the new job evaluation methodology. Moreover, in a relatively small SCS cadre, which is managed as a single resource to meet business need, it could prove problematical to move staff to different posts for development purposes if the job weight of a proposed post was determined by the job evaluation process to be lower and resulted in a drop in salary. This is also an issue when pensions are based on final salary.
23. Scarce Skills and Expertise Premium. This premium would be paid where there is a need to go to the market for recruitment into a post, due to a demonstrable need for individuals with specific skills or expertise, and the market conditions dictate a higher payment than suggested by job weight. It is not anticipated that there would be a significant requirement for this premium in NI. However, members of the SCS recruited from the private sector or wider public sector tend to achieve higher starting salaries than many internal candidates.
24. Variable Performance Related Pay (Bonuses). These would be based on personal objectives, with clear distinction between the objectives that relate to delivering good performance reflected in base pay, and those that stretch the individual and attract an additional performance payment based on a percentage of overall pay that is both non- pensionable and non-consolidated. In the NICS, as in the Home Civil Service there are often strong views expressed about the use of non-consolidated bonuses. The trend over recent years, on the recommendation of the SSRB, has seen an increase in the use of non-consolidated bonuses and decrease in consolidated base pay increases. Bonuses have come to be seen as an integral part of SCS pay. However, the specification of a fixed number of staff to be awarded non-consolidated bonuses can have a demoralising effect on the relatively large proportion of staff who do not receive such bonuses. The review recommends greater flexibility in the use of this variable performance pay to allow for rewarding not only in year objectives but also for performance and delivery over a longer period of time as required by some major projects. It is further recommended that new guidance on performance management is developed that explicitly sets out the available arrangements and provides clarity on the link between delivering objectives and reward. Greater clarity around the circumstances under which non-consolidated bonus payments should be made, and in particular the differentiation between the criteria for such payments and for base pay awards, would probably be widely welcomed.
25. Pension. This is the least well developed of the remuneration proposals and aims to place an emphasis on all elements of reward and not just pay. A recommendation has been made to consider the extent to which flexibility to opt for a cash alternative to pension scheme membership could or should be included in the reward offer to new recruits to the SCS. Pension arrangements for the NICS, including the SCS, have historically followed a position of absolute parity with the Home Civil Service.

Next Steps

26. A team has been established in the Cabinet Office to work with Departments in developing a programme plan to implement the review’s recommendations. A significant amount of developmental work will be required to produce the proposed new job evaluation system required to underpin the determination of job weight, content and responsibility for each post. The NICS will need to keep close to this work, not least because of the importance of having a clearly understood and consistently applied job evaluation system to provide a firm foundation for a pay system and protect against equal pay or age discrimination vulnerabilities.
27. In the NICS, a strategy for the 2009 SCS pay award will be developed following the release of the SSRB report on senior salaries and the Cabinet Office response.