Practical Law

How much should a council pay its chief executive? Should it have one at all? How does the job of a chief executive of a local authority compare with that of a FTSE 250 company? Does higher pay reflect better performance?

These are some of the questions that the House of Commons Communities and Local Government Committee addresses in its report, Local government Chief Officers’ remuneration, published on 12 September 2014.

How much are local authority chief executives paid?

“In a perfect situation, remuneration for senior council staff would be set at the exact level to attract and keep the best candidate, paying neither too little to deter a good candidate from applying nor more than necessary to secure their services, thus ensuring best value for the local taxpayer.”

Few could argue with this statement in the report. So what is an appropriate level of pay for a local authority chief executive?

Current median levels of chief executive pay are:

• District councils: £114,000.
• English unitary authorities: £157,000.
• Metropolitan councils: £174,000.
• County councils: £182,000.
• London boroughs: £184,000.

Within this, there are wide variations, for example the chief executive of the London Borough of Camden earns £155,000, excluding pension contributions, while Wandsworth’s earns £230,000 (although Camden’s chief executive said comparing the two roles would be like comparing chalk and cheese).

How does this local authority chief executive pay compare with other sectors?

A chief executive of a housing association earns roughly the same as that of a district council, and of a clinical commissioning group. A chief executive of an NHS hospital trust and a Permanent Secretary earn slightly more than the median for an English unitary authority. Only academia seems to pay its chief executives far more (well over £200,000).

By contrast, the median earnings of a FTSE 250 company chief executive are £1.3 million.

But is the job of a FTSE 250 chief the same as that in a local authority? How can it be when a local authority has a guaranteed tax income stream? On the other hand, while they don’t face the pressure to generate revenue, they do have to run vital services within increasingly limited resources within a political environment.

The evidence suggests these roles should be compared with caution. While those managing commercial parts of the council have some transferable skills, there is no evidence of significant movement of senior staff to the public from the private sector, perhaps explaining the wide pay gap and why local authorities are not, with the exception of some areas such as children’s services, finding it difficult to recruit and retain good senior staff. On the other hand, the committee heard evidence that the wide pay gap does act as a disincentive for senior staff to move into the public sector from the private sector.

What about the added perks?

Gone are the days (if they ever existed) when working in a local authority meant a job for life. However, at a senior level, officers appear to enjoy more security than their private sector counterparts. The average tenure of a FTSE 100 chief executive is three years and seven months compared to eight years for a local authority.

In addition, local authority employees have benefitted from membership of the Local Government Pension Scheme, a final salary defined benefit scheme. However, with the change to a career average based scheme, which may be more generous for the lower paid but not the high flyers, that perk has been eroded.

Going up, up and staying put

From 2000 to 2009, local authority chief executives’ median annual earnings rose by 75%, almost twice as high as that for all other full-time employees across all grades and sectors. The increase was even higher for NHS senior managers, who saw their pay double in the same period.

However, since 2009 pay has plateaued. 75% of chief executives have their pay set by one of two Joint Negotiating Committees, neither of which has awarded pay rises in the past four annual settlements.

Many councils have gone even further and cut salaries, or recruited new chief executives on lower salaries than their predecessors. For example, following an independent re-evaluation exercise, the Hay Group recommended that Rochdale Borough Council increase its chief executive’s pay by £40,000 to £170,000. The full council rejected that proposal and recently advertised the post at around £130,000.

The committee urged councils to carefully consider the advice they receive from evaluation schemes and recruitment consultants including an analysis of whether local market conditions may enable them to secure as good an officer at a lower rate. The epaycheck system provides up-to-date data on market rates.

However, given the current pay plateau, further pay freezes risk pushing salaries below a point at which it may be difficult to recruit and retain good managers.

Are chief executives necessary?

Brandon Lewis MP, the Parliamentary Under-Secretary of State, informed the committee that while attracted to the local democracy offered by district councillors, he considered it ludicrous that there were multiple support service teams within counties.

Indeed, a common way for councils to save on their salary bill is to share support services, including chief executives and other senior staff. This is not all good news as the savings can be small given the increase in pay to those whose responsibilities increase. Indeed, the Chartered Institute of Public Finance and Accountancy (CIPFA) noted that abolishing or sharing a chief executive’s post may not lead to best value for local communities, since savings of tens of thousands of pounds can be dwarfed by the savings of hundreds of thousands of pounds which their focussed leadership might deliver through service transformation.

The committee recommended that the Local Government Association assess the wider impact of sharing or abolishing senior posts on the efficiency and effectiveness of the council’s leadership.

The committee rejected the suggestion that the roles of the council’s chief executive and its leader could be merged. It considered that this would blur the distinction between two quite separate functions which provide a robust framework for professional advice and challenge over how political objectives are implemented, and oversight and scrutiny of the effectiveness of the council service.

Fair pay ratios

Local authorities are far fairer places to work compared with the private sector. The chief executive to median pay ratio is 6.3:1 in local authorities, compared with 228:1 in the private sector. It is unclear what impact the outsourcing of lower paid jobs has had on these figures. However, many councils have a policy of paying the living wage in any attempt to raise the pay floor.

Access to information, value for money and the revolving door

While regulation and guidance has led to the publication of more information on chief executive pay, there is a lack of consistency in presentation that can make comparing the information difficult. Further transparency is needed, particularly where an officer is being paid via a limited company.

Furthermore, opaque performance measurement processes mean local tax-payers may not be aware when redundancy or discretionary payments have been mis-used. Councils must publish the rationale for, and amount of, any financial payment to a departing chief officer within a month of the decision to make the award so the public can understand why such a payment has been made.

The committee awaits the government’s proposals, announced in the Queen’s Speech, for tackling the “revolving door” where senior staff receive a large redundancy payment and immediately start working in the same sector or even for the same council as a consultant.