Executive pay: what’s the magic formula?

How much should a charity chief executive be paid? It’s not a straightforward question, depending, inevitably, on the nature of the charity. Big? Small? Local? Global? Managing a handful of volunteers or thousands of staff, tens of thousands of volunteers, and billions in investments?

The job of setting senior pay falls to trustees, the volunteers who oversee a charity. Particularly at larger charities, trustees will be feeling the pressure all the more following recent media attention on salary levels. This is why we have set up an Inquiry into executive pay that will provide some solid and practical guidance on setting senior salaries.

It’s striking that in debates on charity pay, standard allegiances are frequently inverted. Those who would usually argue that an unfettered market should determine salaries suddenly call for restraint and regulation when it comes to our sector, while those who would otherwise decry high salaries say the market cannot be ignored.

There’s widespread agreement that setting the right level of senior pay is a tricky task for trustees. The decisions involved are not just technical but also involve organisations’ values and ethos.

Of course, in the voluntary sector in particular, I think, pay is part of the equation, but not all of it. So is enjoyable and rewarding work, a friendly and supportive workplace, a sensible commute, and a million other little things that all add up. Nevertheless, for better or worse, someone who realises their peers are all earning far more than they are is unlikely to be content.

The voluntary sector doesn’t have a monopoly on enjoyable or fulfilling careers in which you can make a difference in the world. Many people do this in the private or public sectors. The salaries of head teachers, council chiefs or senior doctors and others frequently run to six figures or thereabouts. For organisations, scrimping on pay can lead to costs rising and opportunities and experience lost, or never gained, because of high staff turnover.

Yet there’s a bottom line to look at, and salaries have to remain reasonable, affordable and fair. Many donors were clearly taken aback when they heard about top salaries. To make life harder, while there is an inexorable – and correct – move towards transparency in charities as there is elsewhere, there’s also reason to think that transparency about pay has actually driven remuneration up. Nevertheless, I don’t think that refusing to disclose salaries is a credible response, even where it doesn’t fall foul of the Charity Commission’s rules.

So. It’s complicated.

And the magic formula for chief executive pay is…

Each organisation will need to weigh up these factors for themselves. I don’t expect our inquiry to come up with a magic formula, but I hope it will provide a practical framework to help organisations, and trustees in particular.

Along the way I hope we can have some sensible, meaningful and genuinely helpful debates about how we recognise people – both in narrow financial terms but also by being good employers – and how we balance competing demands and expectations for how we use our resources, and also how we explain our decisions.

The group we have convened to create a home for these debates and to produce this guidance is a strong and diverse group with expertise in all the crucial areas. The full membership of the Inquiry is included in our press release, but we have experts in remuneration, HR, accounting and law, among voices from sector organisations of different sizes.

I expect the Inquiry will examine research and data on pay in our sector and others. I’d anticipate them also thinking about how executive pay relates to pay at other levels. Some have called for organisations to aim for specific ratios between their highest and lowest paid staff, for example. (For the record, NCVO is a London living wage employer and our ratio is about 8:1). The exact process will be decided when the group first meets in a couple of weeks. But I expect they will take evidence from a broad range of people with an interest in the issues.

Representatives from a couple of major charities whose pay levels have come under scrutiny have been included among the Inquiry members. The Inquiry will want to know how they arrived at the figures they did. We need a genuine understanding of how they come to these figures and how it feels to go through the process of doing so – what their influences, values and anxieties are. It’s important to look at benchmarking data, for example, but you also have to understand what’s really happening when these decisions are made. (What sociologists might call verstehen, as I used to tell students.)

Some charities that came under the spotlight over their pay have also agreed to put us in touch with donors who complained to them, so the Inquiry will also hear the perspectives of donors who are concerned about pay.

We are aiming for the Inquiry’s work to be complete in spring 2014. If you have any views, suggestions or evidence you would like to submit to the Inquiry to inform its work, please email execpay@ncvo.org.uk.