An exchange between Sir Humphrey Appleby and the Minister of Administrative Affairs in the early 1980s highlights best the remuneration dynamics of the public service. It went something like this:

Sir Humphrey: Her Majesty’s Civil Servants spend their lives working for a modest wage and at the end they retire into obscurity.
The Minister: A modest wage? You get over £30,000 a year. Seven thousand more than I get!
Sir Humphrey: But still a relatively modest wage.
The Minister: Relative to whom?
Sir Humphrey: Well … Elizabeth Taylor for example.
The Minister: You are not relative to Elizabeth Taylor.

Notwithstanding the Reserve Bank’s excellent record and deft management of Australia’s economy, especially during the GFC, its decision to jack up the pay of its most senior management by 30% during the 2008/09 financial year, the nadir of the global financial crisis, might have been impolitic.

Prosecuting tighter monetary policy might be tougher, and the bank’s good reputation marred, as the popular press routinely draw attention to the decision. Moreover, such largesse with taxpayers’ money was bound to elicit a response from government.

Last year it emerged the salaries for the roles of governor and deputy governor surpassed $1 million and $800,000, dwarfing the incomes of key permanent secretaries and the Commissioner of Taxation in Canberra, the Chief Justice of the High Court, the Chief of the Defence Force and practically every bureaucrat in the modern world ever.

The response has arrived. Last month Minister of State Gary Gray designated the governor and deputy governor of the Reserve Bank “principal executive offices”; they will share Classification Band E with the managing directors of Medibank Private, the Australian Submarine Corporation and the CSIRO.

Henceforth the remuneration of the bank’s most senior two officers will be guided by the Remuneration Tribunal, a statutory authority independent of government; the other executives’ salaries will remain subject to the Reserve Bank board. The tribunal believes for example the governor’s responsibilities “are not greater” than the Treasury secretary. Nothing will change in the short-term, however.

The pay increase reflected the “significance and diversity of responsibility” of the positions and the need to “attract and retain” staff. Neither argument is axiomatic.

Assigning relative “importance” to senior public officials, for instance, is problematic. Whether monetary policy is more important than defending the country, interpreting the constitution, or collecting taxes is moot. Everyone thinks his job is significant and diverse.

As for retaining staff, what fraction of governors and deputy governors in the history of the bank have been poached by better offers in the private sector? Zero is the best guess. Moreover, Treasury has retained men of the calibre of Ken Henry and Martin Parkinson, who’ve been scraping by on about $500,000 a year (still about 13 times the median full-time wage). Where was the exodus?

Public sector pay will soon be in the news again. In March 2010 the Remuneration Tribunal indicated it would reveal before year’s end new salaries for departmental secretaries “substantially above the current level”. Eighteen months later we are still waiting.

The debate about the supposed “inadequacy” of public service is naive and insults public servants to boot.

First, the skills acquired in the public service are, generally, not readily applicable to the private sector. Indeed, public servants develop a sense of procedure and caution, nurtured in roles the market is self-evidently not willing to pay for, which can be antithetical to private enterprise. Senior public servants also enjoy very significant non-pecuniary benefits — prestige (including potential receipt of honours), job security, and generous retirement and maternity benefits, for example.

It is naive to assume public servants are driven mainly by money. Our Westminster-style civil service requires and fosters a sense of duty and loyalty among public servants, which constant prattling about “pay imbalances” corrodes.

Executives extract vast sums from their shareholders, but not by compulsion. Remuneration in the public sector, by contrast, must observe a morality and restraint that private salaries do not.

The economics profession has unfortunately entrenched the idea that workers are driven solely by total financial remuneration, that “talent” follows money alone. This perverse understanding is overwhelmingly refuted by introspection and observation, yet it has flourished since the 1980s, reaching its zenith in banks before the financial crisis.

The public service should not degrade itself by aping the greed endemic elsewhere.

I suspect the Reserve Bank governors will have the last laugh, however. The tribunal will “resolve” the remuneration disparity by granting the same $1 million pay to the permanent secretaries as well, which might explain the tribunal’s tardiness in releasing its report.

A random committee of taxpayers would probably not reach the same conclusion.

Peter Fray

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