Public Sector Executive Salaries
John Nethercote
Politics and Public Administration Group
24 May 1999
The three-member Remuneration Tribunal headed by R. G. Humphry, Managing
Director of the Australian Stock Exchange, has recently published its
1999 determination concerning the remuneration of Secretaries of Departments
of State (no. 4 of 1999). It is a landmark determination because of:
- the size of the increases-10 -12 per cent payable on 31 March
1999; and a further 10-12 per cent payable from 31 March 2000
- a shift in approach from salary to a remuneration package, in which
a major consideration is cost to the employer, and
- the introduction of performance bonuses for superior and outstanding
service. These additional payments will be made at the rates of 10 per
cent and 15 per cent respectively of total remuneration.
The most significant of these changes is the introduction of performance
bonuses. They are likely to continue to attract interest both as to the
impact of performance bonuses on the professional character of the chief
executive group and, more directly, the manner of administration and impact
of making appraisals public. This aspect of the determination is examined
more fully later in this Research Note.
Increases
The Tribunal has awarded initial increases of between 10 and 12 per cent
on current packages, payable from 31 March 1999, to be followed by similar
increases on and from 31 March 2000. Details of the increases are
contained in the table.
According to the Tribunal:
[t]he increases in remuneration reflect the changes in work value and
productivity improvements due to greater complexity, efficiency and
accountability of Commonwealth functions ... [S]uch challenges require
chief executives with leadership skills and abilities of the highest
order. These adjustments go some way towards bringing Secretaries' remuneration
into line with their direct counterparts in the New South Wales and
Victorian State public sectors.
There remains, however, a gap between the packages of Secretaries and
business chief executives with comparable responsibilities.(1) The Tribunal
states:
... the community expects that the remuneration paid to public sector
chief executives will be below that paid in the market place.
Packaging
Total employment cost
In a significant change the Tribunal has determined remuneration package
amounts where previously it determined salary rates. As it explains:
[t]his approach, which determines the total employment cost, is in
the public interest as it fully discloses all elements of Secretaries'
remuneration.
The decision to allow salary packaging has been reached in the context
of 'strict taxation laws that limit significantly the taxation advantages'
previously possible. Full disclosure of top executives' salary packages
will be required in annual reports.
Loading if tenure relinquished
As noted, the new package incorporates the tenure loading. Where tenure
rights are retained an amount of up to 20 per cent will be deducted from
the salary component of the package.
Employer superannuation contributions
The package also includes an amount of 13 per cent of the salary component
for employer superannuation contributions:
This amount will be deducted from the package as a notional representation
of the value of superannuation benefits and it will be reviewed in the
future, taking into account the choice of superannuation funds available.
This component of the package cannot be converted to salary.
Vehicle and overseas spouse-accompanied travel
These are also covered by the package: Where a vehicle is retained, its
value (including fringe benefits taxation) will be deducted from the package.
Overseas spouse-accompanied travel will cease to be available as an employer-provided
benefit.
Compensation for early loss of office
In the event of early loss of office, and where the Commonwealth has
not made an offer of suitable alternative employment, a Secretary is entitled
to one-third of one month's salary for each month of a fixed term not
served, subject to a maximum payment of 12 months base salary (either
basic rate salary or, if applicable, the base salary for a specified post).
There is no entitlement where the Secretary serves the full term.
Performance bonus
The decision to introduce what is described as 'an amount of remuneration
that is linked to performance achievements' is likely to be the most contentious
component of the determination.
There will be additional pay for 'superior or outstanding performance'
of either 10 or 15 per cent of total remuneration, respectively. The Tribunal
believes that this is a smaller proportion of total remuneration than
elsewhere and justifies this arrangement, following the Government submission,
which has not been released publicly, on the basis of 'recognition of
the difficulties and political sensitivities when establishing appropriate
performance indicators'.
Indeed, a number of statutory office-holders considered by the Tribunal
to be part of the Secretary group, and covered by the determination, such
as the Auditor-General and the Public Service Commissioner, will not be
eligible for performance pay because it would not be appropriate. Instead,
they will receive a loading to total remuneration of seven per cent.
Little information is provided about the process for determining performance
pay, what sum of money will be available for the purpose, or how many
Secretaries are likely to receive a bonus in any particular year, if there
is to be a limit.
The Secretary, Department of the Prime Minister and Cabinet (PM&C),
and the Public Service Commissioner will have 'a role to play in establishing
appropriate criteria and advising Government on performance outcomes'.
It is not clear whether the 'criteria', when established, will be public.
The Tribunal itself will make decisions about performance bonuses on
the basis of recommendations from the Prime Minister. These recommendations
will be based on reports from the Secretary, PM&C and the Public Service
Commissioner. The latter will report on the performance of the former.
Relevant portfolio ministers will be consulted.
The decisions of the Tribunal, that is, whether a Secretary has been
awarded a bonus and, if so, how much, will take the form of determinations
laid before both Houses of Parliament and will be subject to disallowance
within 15 sitting days.
In explaining introduction of performance bonuses the Tribunal does not
expressly link their availability to evidence about improved performance
either by the individual or the organisation. It refers only to 'an increasing
incidence of variable rewards'. It also states, although the link to bonuses
is not clear, that:
remuneration arrangements ... must be capable of attracting and motivating
individuals and comprehend the short and longer term performance pressures
expected of the holders of public office.
The Tribunal has not sought to address any of the concerns about bonuses
which have been raised during the past decade, for example, by the Senate
Standing Committee on Finance and Public Administration in its 1993 report,
Performance Pay. The Committee's conclusion was that 'there were
fundamental conceptual problems with the system of performance pay adopted
in the APS' (p. 51).
Reservations about the bonus are likely on grounds of principle and practice.
In terms of principle it may be considered that introduction of a discretionary
financial component will further diminish the professional character of
the public service at its highest levels and be an impediment to maintenance
of 'frankness' and 'fearlessness', inasmuch as they continue to be qualities
fostered within administration.
Practical questions may be of greater significance, however. A Secretary's
key responsibilities are diverse and rarely easy to identify in specific,
broadly measurable terms. Moreover, performance is usually integrally
related to that of the Minister. Distinguishing the contribution of each
may be extremely difficult.
It is equally difficult to identify who is well-placed to make informed
appraisals of a Secretary's performance. In this context, it is of note
that the Secretary, Department of Finance and Administration (DOFA) is
not included although Finance is probably the agency best informed about
the condition and efficiency of a department. In Canada's national public
service, by contrast, the counterpart of the Secretary, DOFA, is a member
of the committee which decides department head pay.
The bonuses will be made public and this feature may have a critical
bearing on the efficacy of the policy. In a period when economics is so
central to politics, what inferences would be drawn (by the markets, for
instance) if the Secretaries of the Treasury and Finance were not both
invariably appraised as performing at the highest level? In the international
arena, how would a less than 'outstanding' performance by the Secretary
to the Department of Foreign Affairs and Trade be interpreted abroad?
Irrespective of whether bonuses are needed to motivate Secretaries to
improve their performance, a critical issue will be the workability of
the policy given the impact publication of details of bonuses awarded
will have on the effectiveness or otherwise of the individual secretaries
concerned.
Endnote
- See also Tony Kryger, 'Private Sector Executive Salaries', Research
Note No. 24, 1998-99, Information and Research Services, Parliamentary
Library.
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