Criticism of Higher Civil Servant U-Turn Misplaced?

Writing in the Irish Times, Pat McArdle reckons that criticism of the roll back of the cuts to higher civil servant pay is misplaced. Pat’s key argument is as follows:

The Minister appears to have been influenced by a novel aspect of the review process. For the first time, comparison was made not just with the private sector but also with six other European countries. (Of these, only Britain had any kind of bonus scheme.)

Uniquely, the assistant secretaries were found not to be paid more than in the other countries. This was taken into account by the Minister but not by the Review Body.

Here’s the relevant section of the Review Body report:

4.11 The salary for Assistant Secretary places the Irish post behind the equivalent position in the UK, the latter being 10% ahead of its Irish comparator. The salary for the role in the remaining countries is somewhat lower than that of the Irish post. The rate for the equivalent post in Finland, with which the Irish post is banded, is 74% of the Irish rate.

4.12 When the comparison is made on an adjusted income basis, it is found that the Irish post is behind that of four other countries, viz. the UK, which is 102% ahead, Germany, which is 29% ahead, Belgium, which is 6% ahead and the Netherlands, which is 1% ahead. The adjusted income value of the role in Finland is 97% of that for the Irish position.

It is open to question whether the Irish government should be factoring in high local prices levels when setting civil servant pay, particularly since we are aiming to reduce these levels to restore competitiveness.

The report doesn’t explicitly state how much weight it placed on the adjusted versus unadjusted salaries when arriving at its conclusions. It does, however, note that other considerations were taken into account including the economic environment and the current value in Ireland of the security of tenure:

in Report No. 42, we observed that “the value of security of tenure in present economic circumstances must be regarded as less than that which would apply in circumstances of high unemployment.” We also observed that we would be disposed to discount for security of tenure in different economic circumstances. Since we reported in 2007, the economic environment has, as already mentioned, deteriorated significantly and unemployment is at a very high level and still climbing. Security of tenure is, therefore, more valuable now than in 2007.

So the Review Body was balancing a number of different factors when making its decision and not just looking at the adjusted salary.

McArdle may consider recent criticism to be misplaced but he does not explain why on budget day, the Minister announced that his policy in this area would be based on the Review Body’s recommendations based on its balancing of these various factors and then later announced that it would not. Or whether it is wise to abandon the strategy of following the Review Body’s recommendations. Or whether, as a tactical matter, a government that needs to stick to its budgetary strategy is well advised to start taking steps to overturn decisions on budget day. Or whether, if budget day decisions are going to be reversed, it is advisable to focus only on reversing cuts to the salaries of well-paid senior civil servants.

Bonuses as Deferred Pay

This story is the best explanation we’ve got so far as to how the higher civil servant pay U-turn occurred and the justification used.

THE GOVERNMENT’S controversial U-turn on pay cuts for top public servants followed strong lobbying by their staff association that any cuts should take account of money lost as a result of the abolition of a bonus scheme which averaged 10 per cent of salary.

Official Department of Finance files show the Association of Assistant Secretaries and Higher Grades said it had legal opinion that the performance-related bonus scheme, which the Government initially suspended for 2008 and later scrapped permanently, formed an integral part of members’ remuneration packages.

The key argument put forward:

The association had earlier argued in correspondence with the Department of Finance that “while receipt of the performance-related element of pay is obviously not guaranteed to any individual, the scheme is part of our members’ basic remuneration package and amounts to an arrangement whereby part of that remuneration is simply deferred pending an independent assessment of performance”.

I’m not sure what this is supposed to mean. The fact that the bonuses did not count as pensionable pay and were not eligible for PRSI suggests that they were not part of basic pay. If the legal opinion was an implicit threat that the civil servants could have sued to reverse their pay cuts, I find it pretty hard to imagine such a case being successful.

In any case, it’s still not clear why the U-turn occurred. Minister Lenihan announced the ending of bonuses in February, so he was well aware of what he was doing when he announced the pay cuts in the budget concluding with “These are permanent reductions which will be reflected in future pension entitlements.”

It would be interesting to have heard the speech that Brian Lenihan gave on this issue at the Fianna Fail parliamentary party on Tuesday night for which he reportedly received a round of applause from the faithful.

In relation to this, I appeared on the radio on Tuesday night just after this meeting (link here) and heard Fianna Fail TD Michael Mulcahy suggest that the U-turn came from following the recommendations of the Review Body report and that the U-turn occurred because the report wasn’t released until after the budget. In truth, the U-turn runs counter to the report’s recommendations and the Minister had access to the report before the budget (he mentioned it in his speech.) These didn’t seem to be very satisfactory talking points on this issue from someone who had just received a full explanation from the Minister.

If the government thinks that misleading spin is the way to make this issue go away, I suspect they’re wrong. The fact that the usually-supportive Stephen Collins has taken up the issue also suggests that the government isn’t winning people over on this one.

Civil Servant U-Turn Explanations Getting Worse

I noted a few days ago that the government’s justification for the U-turn on pay cuts for senior civil servants was to cite the international benchmarking carried out for the Review Body report that recommended the cuts in the first place. This seemed an unsatisfactory defence of this controversial decision.

Yesterday in the Dail, the Tanaiste put forward a new justification for the decision (link to Dail transcript here). The Tanaiste said “With regard to the pay and conditions of assistant secretaries, the review body on higher level pay indicated that the bonus was indicatively part of their salary.”

If I understand the argument correctly, the Tanaiste is saying that the Review Body’s report indicated that the salary that it was recommending be cut included the bonuses, in which case the government was not actually implementing the report’s recommendations in the first place but that policy was now consistent with the report because of the U-turn.

Well, here’s the Review Body’s report. It’s not that long and I’ve read it a couple of times. And as far as I can see, the Tanaiste’s claim is, well (… looking for polite term for it) not correct. I can’t find anywhere in the report where it says that the bonus was explicitly, implicitly, or, indeed, indicatively included in the baseline salary recommended to be cut.

In fact, there’s pretty solid evidence that the Review Body was explicitly excluding bonuses from the salaries being considered: The “current rate” salaries cited on page 5 of the report are base salaries excluding bonuses. This doesn’t seem to leave much room for the idea that the Review Body was including bonuses as part of the salary to be cut, whether indicatively or otherwise.

Is it really too much to ask for a for a simple and honest explanation for this decision, i.e. one that doesn’t rely on misrepresenting the report that recommended the cuts in the first place?

No Explanation for Senior Civil Servant U-Turn

The year’s first week of Dail sittings came and went without much attention being paid to the government’s U-turn on its decision to cut the pay of Assistant Secretaries by 12 percent and the pay of Deputy Secretaries by 15 percent.

The lack of attention to this U-turn—the only cut in the budget that has been rolled back, as far as I know—could reflect a lack of interest from the public, who perhaps think that senior civil servants were being unfairly treated by the budget proposals. Alternatively, the lack of interest may reflect the original timing of the announcement—just before Christmas Eve and three weeks before the next meeting of the Dail, by which time other issues (such as banking inquiries) had arrived along to distract the public.

Credit then, to RTE’s Rachel English for putting a question about this U-turn to junior minister Dara Calleary on her Saturday View program. Mr Calleary’s response was “There’s a U-turn in relation to 160 people whose salaries are benchmarked against a European level unlike most others in the service.” This follows a similar line used by the Minister for Finance. The Irish Times reported:

Mr Lenihan said the pay of workers at this particular grade had been benchmarked against their counterparts in other European countries and they were not paid more than those at equivalent positions.

The benchmarking exercise that Ministers Calleary and Lenihan were referring to (the report of the Review Body on Higher Remuneration in the Public Sector) is here.

It discusses international comparisons and then recommends exactly the type of pay cuts that the government introduced in its budget. So the government’s defense of this U-turn is to use the same report that it used to justify introducing these pay cuts to now justify rolling back the pay cuts. This is hardly a satisfactory explanation.

A Christmas Present for Senior Civil Servants

On budget day, the Minister for Finance announced that civil servants earning between €165,000 and €200,000 would take pay cuts of 12% while those earning over €200,000 would take pay cuts of 15%. Yesterday, with the public focusing on their pre-Christmas preparations, the government announced that this would not be happening after all.

These pay cuts have been rolled back for two reasons. First, the government announced that it was going to take into account the elimination of “performance-related awards” which had averaged ten percent of their salary. As a result it reduced the new pay cuts for some civil service grades to reflect the loss of this ten percent.

Second, it was decided that the differential rates of adjustment, with higher cuts for those over €200,000 would introduce anomalies in which there would be overlaps such that those on higher points in lower scales would have better salaries than those on lower points of a higher scale.

The statement points out the implications of the decisions taken:

The resulting adjustments including the effect of the termination of the scheme of performance-related awards produce reductions in remuneration of 14% in the case of the grade of Deputy Secretary and 11.8% in the case of the grade of Assistant Secretary.

Or, in other words, given that the bonuses were gone already, these measure will imply a cut of only 3% for Assistant Secretaries and only 5.4% for Deputy Secretaries (based on 0.882*1.1= 0.97 and 0.86*1.1= 0.946).

The Irish Times reports that a government statement said that it would have “been unfair” to these grades not to make these adjustments.

A couple of comments about this.

First, these performance-related awards were, as their name suggests, not guaranteed but (at least in theory) related to performance.  This move appears to be an effective admission from the government that these payments were not in fact performance-related bonuses but part of the core pay of these civil servants. For a government that claims to be keen to introduce reform into the civil service (something that should include bonuses as incentives for good performance) this is a very unfortunate precedent.

Second, these bonuses were not pensionable. Because civil servants’ pension obligations are still based on the full pre-pension-levy salaries, this means that the pensionable salary of an Assistant Secretary has only fallen 1.8% this year. Senior civil servants close to retirement have been almost completely protected from the consequences of the fiscal crisis.

Third, the Review Body on Higher Remuneration, whose recommendations the Minister had claimed to be implementing, explicitly made its recommended cuts in terms of regular salary. This is not because they were unaware of bonuses. They stated:

the continuation of performance-related awards cannot be justified in the current climate. Having said that, it remains our view that such awards will have an important role to play in the future when economic stability has been restored.

In other words, their recommended cuts were in addition to the suspension of bonuses, which they recommended re-introducing at some point.

Fourth, it appears that senior civil servants are the only group in Irish society that get to count earlier cuts as part of their current cuts. For instance, the cuts to social welfare payments announced in the budget are in addition to the 2% cut related to the elimination of the Christmas bonus. Would the government consider changing its cuts in social welfare rates to take account of this?

Finally, perhaps it is cynical to suggest that this information was released just prior to Christmas in the hope that the public would not notice. If this was indeed the intention, somehow I don’t think it’s going to work.