I’ve been asked to post this important ‘think piece’ by a group of World Bank and OECD officials about the issues concerning the pay of private sector managers of banks and other institutions that have been effectively nationalised.
There is also an on-line survey that the authors would like completed Link to on-line survey.
Some initial thinking on the implications of public subsidies for private sector firms for decisions about individual pay
This note was prepared by Tanya Gupta, Mariano Lafuente, Nick Manning, Jeff Rinne (LCSPS) with LilyChu from the World Bank and by Janos Bertok from OECD.
Since the last quarter of 2008, governments across the OECD have responded dramatically to the financial crisis: some $500 billion was invested in the financial systems of developed countries by the end of 2008. The Emergency Economic Stabilization Act in the USA, the UK Government’s credit guarantee scheme, and similar developments elsewhere have turned governments into the effective owner of a number of banks, brokerages, and even insurance firms.
When people and institutions migrate into the public sector, should they be forced to behave like other public bodies? In the US, the Obama Administration has concluded that the answer, at least in some instances, is yes. On February 4 new compensation rules were issued to cap the pay of senior executives at firms that receive significant rescue funds through the Troubled Asset Relief Program (TARP).
These issues may be increasingly relevant for Middle Income Countries outside of the OECD. For example, in Latin America while, to date there have not yet been massive failures that have required the governments to take major stakes in private banks it is expected that the government role will increase. In Brazil, the state-owned banks Banco do Brasil and Caixa Economica Federal (CEF) have been given a broad mandate that allows them to buy stakes in banks, insurance companies and non-financial firms in need of financial support. Credit lines through state banks or other financial entities have been set up to support retail, housing, agriculture, and automotive sectors in a number of countries (Argentina, Brazil, Chile, Mexico, and Peru). New small- and medium-enterprise credit lines through state entities in Chile, Mexico, and Peru have also been announced.
What does the public look for in public servant behavior?
All OECD countries sanction corrupt behavior by public officials; and disclosure of income and assets is increasingly common. The three guiding assumptions that seem to underpin public sector pay-setting do not appear to have changed.
First, public servants are generally not involved individually in their own pay determination. Individual negotiations generally have little part to play in the dispassionate and rule-based approaches.
Second, pay in the public sector is not just a question of what is right or fair for the individual. Put starkly, if the public thinks that public service pay is significantly too high, then, generally speaking, it is.
Third, there is a greater degree of pay transparency expected of the public sector. This is certainly not the same as placing the full compensation details of all public servants on a public website. The usual compromise is that while individual pay is not published, there is public reporting of the pay scales available for public servant positions, and the potential room for maneuver in terms of performance and other bonuses.
Lessons for the new public servants?
It is more difficult to identify the boundaries of the public sector today than it was a generation ago. The key is to look for the organizations, or parts of organizations, whose activities are underpinned by an implicit guarantee from the government. For these new entrants to the public domain, compensation (in)equity with the old public servants has been behind much of the recent highly-charged debate. As the policy debate calms down, we are likely to see some further alignment between the values and approaches to pay determination for employees in the formerly purely private firms, and their colleagues who have been in the public domain far longer. First, more objective and independent processes for pay determination for senior staff seem likely to emerge. Second, there will undoubtedly be further movement towards levels of pay that the public find acceptable. Third, and most dramatically, the underlying basis for individual pay decisions — the scales and the comparators that were used — will start to emerge explicitly.
Beyond the questions of compensation, new codes of conduct and ethics to deter conflicts of interest could become standard practice in the formerly private firms, emphasizing: impartiality and facts rather than narrow performance pay-enhancing decisions; disclosure of personal and family assets and a dramatic reduction in vendor perks and other gifts; and the obligation to act as an ethical example to others.
One nagging issue that remains concerns lobbying practices in the pursuit of enhanced budgets. Lobbying by public servants to maximize their budgets is hardly unknown. Thus, even the imposition of public sector ethical standards on the recently nationalized or bailed-out financial institutions is unlikely to provide a simple remedy to the much-maligned practice of using public funds to hire lobbyists with the goal to get still more taxpayer money.