Hamish McRae: Let's not get nasty over others' pay

So there are more than 170 civil servants who earn more than the Prime Minister. Does that mean they are paid too much? Or maybe he is paid too little? Or is the problem of the cost of the public sector less that some people are paid too much than that there are too many of them – and this explains its apparent falling productivity?

What people are paid – plus most obviously what they get in allowances and expenses – has become such an emotionally charged issue that it is hard to step into it without arousing fury. We have as human beings deeply embedded notions of what is fair and what is not fair and thank heavens we do. If we did not have these social and economic mechanisms which enable us to co-operate with each other, we would never have made that great leap from a higher mammal to homo sapiens. Fairness is the key to co-operation, the glue that holds our economic society together, for without it we would have been unable to specialise and create the hugely complex society we have now.

Unfortunately there is another economic force at work: different rewards for different types of skill, with some skills highly valued, perhaps absurdly so, while others which common sense would say were equally valuable to society are at best very poorly rewarded.

So there is a huge tension. For economics to function there has to be a sense of fairness – Adam Smith observed how the market turned strangers into honorary friends – but the market for skills is an odd one, even when it is functioning properly, which it frequently does not. In any case the market changes over time. Footballers are now at the top of the entertainment industry in terms of the numbers that earn more than £1m a year. Not many actors reach that level. Yet in the 1950s film stars vastly out-earned footballers. The skills are broadly the same; the rewards utterly different.

And so it is with the public sector. A generation ago public servants, at just about every level, expected to earn somewhat less than their equivalents in the private sector. In return they had greater job security, a better pension, and, at the top levels, the appropriate gong. They also had status, respect in the community, even if they were sometimes gently mocked. So the home civil service and, perhaps even more so, the Foreign Office had the pick of the brightest crop of young people in the land. But then the gaps in pay were manageable. You got rather more in business or finance but not vastly so. If you really wanted to make money, you did not take a job at all: you set up your own business.

This gradually changed for reasons I don't think we fully understand, for differentials widened in the private sector in almost all Western societies. There seems to have been some increased demand for very special skills and it became apparent that some skills – particularly among sports people – are very rare. But even fairly basic employees in some industries, most notably finance, suddenly shot ahead.

Another part of the explanation comes in the need to win. If you are fighting a legal action you want the best lawyer. The additional fee you might have to pay over and above the second best one is worth paying. There is no point in hiring a reasonably competent middle-ranker because you will probably lose the case. By contrast, if you run a production line a competent middle-ranker is just fine.

Still another bit of the explanation lies in globalisation. Some skills travel; others don't. Where there is a global market, for example in investment banking, people move to the best-paid locations. Where there isn't, and most civil servants are national rather than international, people are stuck with local wage rates.

Then there is the idea of the bonus. This was developed in stockbroking because company or partnership earnings were so variable: low basic pay and no bonus in a bad year but a 100 per cent bonus in a good one. This gradually spread to other businesses, and the formulae for setting them became increasingly arcane. What was fundamentally a sound idea – variable pay – became corrupted. People who had somehow crossed a magic line in their employment got paid a bonus simply for doing their job, and sometimes not even doing it very well.

The public sector, urged by management consultants, felt it had to respond, with catastrophic results. It could not give share options so it created complex performance formulae, with odd results. Alongside this came the target culture, which distorted how people behaved: you met the target, however crass it was, and you were rewarded. The fact that you had wrecked the service was someone else's problem.

Any system of pay will be deeply imperfect. In the good times society will accept roughness because everyone is doing all right. But now, in what will be very difficult times, there is a great temptation to lash out. Vague perceptions of what is "fair" will clash with what you need to pay to get someone to do a decent job. It is intuitively right that people who are paid by the taxpayer should be under close scrutiny. The more we know about public finances the better equipped we are to make a judgement as to whether our taxes are being well spent. There is a difference between public and private sectors: we can choose not to go to a restaurant or not to buy a new car but we can't choose not to pay income tax.

But it would be dreadful if we allowed this whole debate to become nasty. In any case I at least am less worried about some civil servants being overpaid than I am about lots of poorly paid people in private and public sectors being undervalued. All jobs matter and deserve to be respected, especially if they don't command a bonus.

h.mcrae@independent.co.uk

Further Reading

'The Winner-Take-All Society' by Robert H Frank and Philip J Cook