For many years now the Education and Skills Funding Agency (ESFA) have written to academy Chairs asking for justification and rationale on executive pay. School trusts have reached out to us for advice to help them meet their obligations within the Academies Financial Handbook.
For many years now the Education and Skills Funding Agency (ESFA) have written to academy Chairs asking for justification and rationale on executive pay. As executive pay decision making has become trickier, school trusts have reached out to us for advice to help them meet their obligations within the Academies Financial Handbook.
Over the last two years we have advised over twenty-five school trusts on the setting of executive pay. Every project is different because no two school trusts are the same. We take the time to understand the context of the trust, the level of challenge, the organisational structure and distribution of leadership. We look at geography, the strategic plan, past growth, future planned growth and, of course, performance indicators. If so much information is required to follow a robust and evidenced based process in regard to executive pay setting, then is it appropriate to assess pay against a rigid pay threshold? When these letters arrive, the Chair has to produce lengthy responses justifying the salaries awarded to their leader(s). Despite these lengthy responses, the Trust can still be ‘named and shamed’ by the ESFA and press attention duly follows. It is a frustrating situation for the leaders and the Board.
For many years’ academies were given freedom to set executive pay with little regulation, steer and advice. In the beginning, Boards would make pay decisions in line with the School Teachers Pay and Conditions Document (STPCD). As Headteachers, have become Executive Headteachers and then become CEOs and as school trusts have developed and grown in size, pay decisions have undoubtedly become trickier. Alongside this, the ESFA have increased regulation but provided no advice, direction or support to Boards to get decisions right, instead there are letters asking for lengthy justifications, penalisation in CIF bids and ‘naming and shaming’ publicly.
The ESFA appear to be working to a pay threshold for executives in school trusts and given the complexity surrounding executive pay this is extremely simplistic.
The annual pay review for the CEO in any substantial business is a major exercise every year. Performance is thoroughly taken into account and the Board bring in expert advice to help decide what the CEOs bonus might be or what the increase to base pay could be. School trusts are complex organisations and the largest trusts are significant business with similar turnover to household names in the corporate world. Pay thresholds as currently in the academy sector are arguably not realistic. Without greater flexibility they won’t promote strong performance and they could well discourage talent from wanting to lead school trusts.
In addition to the context, we consider the forces that exist in the sector that are driving salaries. As Leora Cruddas, CEO, Confederation of School Trusts (CST) pointed out in her email bulletin to CST members on 4 September 2020, there are a number of pay arrangements that are within the gift of the government that force salaries upwards in the academy sector, beyond £100k and the STPCD is certainly one of them. As Leora rightly pointed out:
Traditionally, if an organisation is embarking on a new reward benchmarking exercise, you start with the CEO. You assess the most senior executive post and then you move to the next level down and then the next level down and so forth. The problem with school trusts is that a headteacher could be two or three levels below the CEO and if you have a Group 8 school in your trust, in inner London, then you could have a Principal earning up to £125,098 per annum in 2020/21. For the rest of England, a headteacher in a Group 8 school could earn up to £117,197 per annum (2020/21). This presents a pressure in the reward structure in a school trust to ensure that there is appropriate distance between the Principal level in the organisation and the next level up and so forth.
Whilst it’s not unheard of, it’s a rarity to find someone in an organisation earning more than the CEO. Where it is found it is usually due to TUPE or legacy and is mostly identified in high performing sales executives in the private sector, earning extraordinary bonuses. It would be inappropriate for a school Principal to earn more than the CEO.
Many Boards have found different ways to determine the salary level for their executives. The Academies Financial Handbook expects Boards to follow a robust and evidenced based process but what does that mean in practice? Some Boards will gather together their own salary information from various sources, via contacts in local trusts or via some other means.
Some use salary survey data to determine the salary level by working out what the market expectation is for an executive role in an organisation like theirs. Other Boards will simply have a discussion to decide what they think is appropriate. The Board should ask itself if the route they follow will withstand public scrutiny and will meet the test of robust and evidence based. It is unlikely that a simple board discussion will cut it. Whichever route taken; Boards should consider how much evidence it has available to justify pay decisions.
Gathering your own data for benchmarking can sometimes lead to the comparison of pay, trust to trust. A Board may compare the pay for their CEO to the pay earned by another CEO in a different trust. There is a real danger in placing too much emphasis on another CEO’s salary when you don’t know how robust or evidence based the process was that determined it. In effect the Board will be relying on another Board’s process and decision making, which could be flawed. For this reason, it is important to have multiple sources, ideally anonymous so that discussion is based on market expectation and median averages.
Setting executive pay is not simple, a threshold is inappropriate and there are complexities to navigate. Therefore, it’s important that Boards understand this and the process at the outset. The Chartered Institute of Personnel and Development (CIPD) have questioned the effectiveness of remuneration committees (all sectors) when it comes to the setting of executive pay. The UK’s Corporate Governance Code stipulates that boards create a culture that aligns with company strategy, and to assess how they preserve value over the long-term. This is similar to the expectations of the Academies Financial Handbook. Boards should consider training before it begins the discussion about executive pay and perhaps also consider bringing in a specialist external advisor just as it might bring in an external advisor to deal with performance appraisal. Regardless it is important that everyone is clear on eth process and procedures that will be used at the outset.
In summary, it’s not clear that the ‘naming and shaming’ of Trusts receiving letters from the ESFA linked to pay above a certain level has had any positive impact over the past few years. It seems to cause more harm than good overall. Nonetheless, the general direction of travel with executive pay in the UK (regardless of sector) is that there is a drive for greater amounts of transparency and remuneration committees should appropriately skill-up or bring in external advice so as to ensure that the process, methodology and decision making is worthy of the transparency. The Board should consider if it is in the best position to share its version of the truth and whether the detail behind these decisions is sufficient to withstand public scrutiny when challenged.
It is also worth taking a step back to reflect that the process and the way you apply it on setting executive pay may be used by others as a proxy for how effective governance is at the trust and whether or not the trust lives its values. Put another way, an effective executive pay process not only addresses the ESFA direct concerns, fairly rewards senior leaders but it also can demonstrate the effectiveness of the trust’s governance and demonstrate the organisation’s values in practice.
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