Scottish Government

3. CHIEF EXECUTIVES: FRAMEWORK

Who is it for?

3.1 This part of the pay policy applies to Chief Executives and, in exceptional circumstances (and only with prior approval), Directors who are not considered alongside other staff in the public body's pay remit. Where reference is made to a Chief Executive in this policy document, then this should be taken as also referring to any Director for which such approval has been given.

3.2 The extent to which the appointment requires Ministerial approval is dependent on the legislative arrangements for that particular public body. However, in all cases, Scottish Government approval of the remuneration package is required prior to this being advertised.

3.3 This part applies equally to the appointment of a Chief Executive to new public body; the appointment of a new Chief Executive to an existing body and when a review of an existing Chief Executive's remuneration package is being undertaken (including, for example, the introduction of additional non-pay rewards, such as a car, etc.). The pay policy on annual increases is set out in Section 4.

What is the Scottish Chief Executive Pay Framework?

3.4 In order to ensure consistency and fairness between the remuneration of senior staff in Scottish Government Agencies and Associated Departments, who are civil servants, and that for Chief Executives in public bodies covered by this pay policy, the salary and pay range of a Chief Executive must lie within the Scottish Chief Executive Pay Framework. This Pay Framework has been used for a number of years and the Scottish Government revises it annually in the light of Senior Salaries Review Body recommendations to the UK Government and the UK Government's decisions for the Senior Civil Service pay framework.

3.5 The Scottish Chief Executive Pay Framework for 2009-10 is set out as follows:

Table 1: Scottish Chief Executive Pay Framework 2009-10 (base pay)

3.6 The Scottish Chief Executive Pay Framework operates on the basis of base pay with salary and pay ranges excluding any bonus (non-consolidated performance payment), pension and the cash value of any non-salary rewards. Some evaluation systems also refer to total cash reward which might include bonus, pension and the cash value of any other non-salary rewards, but this should not be used in determining the market median.

3.7 The salary and pay range of a Chief Executive is expected to lie within the minimum and maximum of the relevant Pay Band in the Scottish Chief Executive Pay Framework. A pay range that extends beyond the maximum in the relevant Pay Band must be supported by clear and convincing market evidence. The proposed pay range maximum must be within the ceiling of the relevant Pay Band within the Scottish Chief Executive Pay Framework and is expected to remain so.

3.8 Chief Executives are either on a spot rate of remuneration (which reflects the market rate for the job) or on a pay range (allowing individuals to progress, through performance and experience, towards the maximum of the pay range: the market rate for the job).

3.9 The pay policy expectation is that a Chief Executive should be remunerated by way of a pay range, with progression linked to performance through the delivery of agreed objectives. This is principally for two reasons. First, it provides that annual pay rises are, in part, based on performance; and secondly, that a Chief Executive will progress towards the maximum of their pay range over time, as they increase their knowledge and experience of the role. Only in exceptional circumstances would a new Chief Executive be appointed on a spot rate and this would require the approval of the Scottish Government Remuneration Group.

3.10 Public bodies should therefore give consideration to moving existing Chief Executives on spot rates to pay ranges, following an evaluation of the role and responsibilities of the job and remuneration.

What needs to be taken into account when determining a Chief Executive's remuneration?

3.11 The first step in establishing the appropriate level of remuneration for a Chief Executive is to identify the appropriate Pay Band within the Scottish Chief Executive Pay Framework for that particular post. This can only be determined following a job evaluation exercise of the role and responsibilities of that post. The job evaluation should be undertaken by the public body, though where this is not possible the Scottish Government may be able to assist. In such circumstances, advice should be sought from the Finance Pay Policy team. The Finance Pay Policy team should also be approached if, following the evaluation, the appropriate Pay Band is not clear.

3.12 Once the appropriate Pay Band has been arrived at, the public body should develop proposals for a pay range for the Chief Executive. In doing so, public bodies should take into account the operation of the Scottish Chief Executive Pay Framework. The minimum and maximum of the relevant Pay Band in the Scottish Chief Executive Pay Framework should not simply be taken as the minimum and maximum of the proposed pay range. The pay policy expectation is that an appropriate pay range for the Chief Executive should lie within the minimum and maximum parameters in the relevant Pay Band in the Pay Framework.

3.13 When determining the appropriate pay range for the Chief Executive within the Scottish Chief Executive Pay Framework, a public body must take into account the following:

Affordability and sustainability

3.13.1 Long-term affordability of the proposals is important and the public body must confirm that it considers the proposals are affordable and sustainable. Proposals are expected to be affordable within existing resources. However, where additional resources are required, these must be set out clearly. In all cases, the Scottish Government Sponsor Team must confirm the affordability and sustainability of proposals, seeking the views of their portfolio Finance Team where appropriate.

Referencing external market levels

3.13.2 The pay policy expectation is that the maximum of the proposed pay range should be no greater than the median of salaries in the relevant labour market. So, to support any proposals, evidence must also be provided of the remuneration offered by comparators. In the first instance, this should focus on the Scottish public sector labour market which includes Scottish public body Chief Executives in the same Pay Band. The Finance Pay Policy team can provide a list of comparable Chief Executives of Scottish public bodies. In assessing proposals, the Finance Pay Policy team will compare proposals with the pay ranges of such Chief Executives.

3.13.3 Public bodies may provide additional evidence where the labour market from which the Chief Executive might be recruited is wider in scope than Scottish public bodies. Again, the focus should be on the labour market in Scotland, but this may include wider market data where relevant. In such circumstances, a public body must explain the relevancy of that market data. Market comparisons should be made on the basis of similarly weighted posts including, where practicable the total reward package ( e.g. information on the length of working week, pension provisions and benefits, annual leave, etc.) of comparators. Before gathering such information, public bodies should discuss the proposed labour market with the Finance Pay Policy team.

3.13.4 Market evidence that demonstrates clearly the necessity of offering remuneration above the maximum of the relevant Pay Band in the Scottish Chief Executive Pay Framework will be required where this is proposed.

Internal referencing with the public body's senior management team

3.13.5 When developing proposals, the public body must consider the relationship and differentials between the remuneration of the Chief Executive and that of the senior management team.

The remuneration of the previous occupant of the post

3.13.6 Public bodies should consider the previous Chief Executive's pay range. If the appointment is to an existing post and an evaluation or review of that post was carried out within the last three years, unless the Chief Executive's role has changed significantly, the pay policy expectation is that the pay range of the new Chief Executive will be the same as that of the previous Chief Executive. However, this is dependent on whether that pay range continues to meet equalities obligations (see paragraph 3.13.7). Even if a review had been undertaken within the last three years, Scottish Government approval of the proposed remuneration package and starting salary will still be required. The pay policy on the appropriate starting salary is set out in paragraphs 3.14.3 and 3.14.4.

Equalities legislation

3.13.7 Public bodies must take into account equalities legislation when determining a pay range for the Chief Executive. Among other things, it must allow for a reasonable timescale (the journey time) within which the Chief Executive can expect to progress to the maximum of the pay range (see paragraphs 3.14.5 and 3.14.7). The public body must satisfy themselves in respect of their obligations and duties in this regard and must include written confirmation of this when submitting proposals for approval.

What should the business case supporting a Chief Executive's remuneration proposals contain?

3.14 When submitting proposals for approval, a public body must also include a business case which must include:

The results of the job evaluation

3.14.1 The type of job evaluation system used, including confirmation that it is analytical and non-discriminatory. The date and results of the job evaluation exercise which indicates the relevant Pay Band in the Scottish Chief Executive Pay Framework.

The proposed pay range

3.14.2 A proposed pay range minimum and maximum within the Scottish Chief Executive Pay Framework that is supported by market evidence from the Scottish public sector labour market and, where appropriate, relevant labour market (as set out in paragraphs 3.13.2 to 3.13.4). The proposed pay range maximum must be no greater than the median of salaries in that market data.

The starting salary

3.14.3 A public body must indicate the anticipated starting salary, which must be the minimum required to recruit and retain the best candidate. The starting salary can be agreed at a level between the minimum and 25% (the lowest quartile) of the approved pay range.

3.14.4 If the Chief Executive is being recruited to an existing post, the starting salary of the incoming Chief Executive should not simply match that of the previous incumbent. If a starting salary outwith the lowest quartile is being proposed, then the public body should state in the business case; the proposed salary and why they consider such a salary is necessary.

The method of progression

3.14.5 A public body must outline the method of progression; summarising the appraisal process and the intended progression increments (for example; fixed or variable steps; by cash amount or percentage, etc.) and demonstrate that progression is compatible with current and future pay policy parameters in relation to annual uprates.

3.14.6 Progression is a major factor in determining the journey time from minimum to maximum of a pay range. If a public body considers that its obligations under equalities legislation limits a journey time to five years, the proposed increments should be in line with pay policy whilst allowing for progression (subject to satisfactory performance) within such a timescale. If, for example, a public body considers that a journey time of five years is appropriate and has intended progression steps of around 2.50%, then the pay range can be no more than around 12-13%. In this case, a pay range will be too wide, if either:

• the size of the progression steps result in a journey time from minimum to maximum which takes longer than five years; or,
• journey time is five years, but the progression steps necessary to achieve this will or will be likely to exceed pay policy parameters in the future.

3.14.7 It is important to note that, unless approval has previously been given to a multi-year arrangement, annual increases (progression increments or Basic Award) are not guaranteed. Annual increases remain subject to Scottish Government approval. No contractual obligation or expectation to annual increases should be created nor implied in contract or correspondence unless a multi-year arrangement has been approved. Public bodies must ensure that any contractual documentation should be clear in this regard and the Finance Pay Policy team must be consulted on the remuneration clauses in draft contracts or letters of appointment (see paragraph 3.42). Further detail on the process for seeking approval for multi-year arrangements is covered in paragraphs 4.13 to 4.18).

Any bonus arrangements (non-consolidated performance payments)

3.14.8 This is set out in paragraphs 3.27 to 3.37.

Any non-salary rewards

3.14.9 This is set out in paragraphs 3.38 to 3.40.

How do you move a Chief Executive to a pay range?

3.15 The process involved in determining a new remuneration package for a Chief Executive when moving from a spot rate to a pay range is similar to that when making a new appointment and so the same process should be followed.

3.16 As spot rates of remuneration are expected to be market facing, the proposed pay range should be built around the existing spot rate (with the pay range maximum reflecting the spot rate). However, it is likely a public body will have to undertake a review of the post and the relevant labour market in order to establish the appropriate pay range.

3.17 If the relevant labour market data demonstrates that the market median is higher than the current salary, then approval may be sought for a new pay range reflecting the market median, within the Scottish Chief Executive Pay Framework, in line with the process for reviewing a Chief Executive's remuneration. The existing spot rate of remuneration, however, should not be used as the basis for establishing the new minimum of the proposed pay range.

3.18 The Chief Executive would normally be assimilated on to a point on that pay range at or close to the existing level of remuneration. The movement to a pay range should not, in itself, give rise to an increase in remuneration. The annual progression increase under the new arrangements would then be applied. Any proposal to assimilate the Chief Executive on to any other point on the pay range must be supported by a business case that sets out why this is required. This should take into account the existing skills and experience gained by the Chief Executive in the post up to the present time.

How do you revise an existing pay range / salary following a review?

3.19 It is good practice to review a pay range (to ascertain whether it has fallen significantly behind the market) on a regular basis and this should be done at least every three years. Reviews should not be done any sooner than three years after the previous review, unless the role and responsibility of the post has changed substantially since the last review or the proposals are to move a Chief Executive from a spot rate of remuneration to a pay range.

3.20 If there are exceptional circumstances where a review should be undertaken within this three year period for reasons other than those set out above, approval must be sought from the Scottish Government Remuneration Group in advance.

3.21 The fact that a Chief Executive may have reached the maximum of the existing pay range is not, of itself, sufficient justification to revise the pay range.

3.22 Where it is proposed to increase an existing pay range minimum and maximum by more than the level of the annual Basic Award, then such proposals must be supported by a business case, covering the information set out in paragraph 3.14.

What about temporary Chief Executives?

3.23 If it is proposed to appoint a temporary Chief Executive (for example an interim or acting Chief Executive), then approval must be sought from the Scottish Government Remuneration Group prior to any appointment.

3.24 If the temporary Chief Executive is likely to be an internal candidate, then the proposed salary should be based on the public body's existing temporary responsibility allowance scheme. If there is no temporary responsibility allowance scheme in place, the provisions should mirror that for Scottish Government staff. Provided such arrangements are proposed, then the proposals may be approved at official level (see Section 5).

3.25 If the candidate is to be recruited externally then this appointment should be treated as a new appointment; the approval process for new appointments should be followed and approval by the Scottish Government Remuneration Group will be required (see Section 5). The pay range of the previous Chief Executive may still be appropriate if the individual takes on the full role and responsibilities of the post, though the pay policy expectation remains that the salary will be within the lower quartile of that pay range.

3.26 The remuneration arrangements that may be approved for a temporary Chief Executive may differ to those for the outgoing Chief Executive and may have no bearing on those of any future permanent Chief Executive.

What is the policy on bonuses (non-consolidated performance payments)?

3.27 In addition to base pay, a Chief Executive's remuneration package may include the potential to earn a bonus (a non-consolidated performance payment) for performance which is 'exceptional'. Any bonus payments made to Chief Executives should not be consolidated into pay ( i.e. they must be non-consolidated) and must be non-pensionable.

3.28 The maximum potential bonus in any year under this policy is 10% of base pay at the end of the appraisal year to which performance relates. The only exception to this is where bonus provisions above this percentage have been agreed previously by Ministers on an exceptional basis and are contractual. In such circumstances, the level of bonus awarded may be above 10% but limited to the percentage approved by Ministers and set out in the Chief Executive's contract of employment.

3.29 If a public body proposes to include or introduce a bonus arrangement, this must be done as part of the remuneration proposals for which approval is being sought. All proposals for a bonus must include a business case setting out how the bonus arrangements will be linked to the delivery of key outcomes. Where there is to be a reference to a bonus in the Chief Executive's contract, public bodies must make it clear that, as the bonus is part of the wider remuneration package, it is also subject to annual approval by the Scottish Government. Furthermore, no contractual commitment should be given by a public body to paying a bonus in advance of approval or by a certain date.

3.30 A bonus cannot be proposed if it relates to performance that is simply:

• satisfactory (for those on pay ranges this would normally rewarded by progression);
• meeting routine objectives / targets;
• doing what a Chief Executive is expected to do as part of their day to day job.

3.31 Public bodies must ensure bonuses are not awarded simply for meeting objectives, but for exceeding them or for other 'exceptional' performance or circumstance. What constitutes 'exceptional' performance might therefore be performance which is above and beyond routine objectives or goes beyond the norm of what a Chief Executive is expected to do as part of their day to day job. This could be:

• performance which exceeds routine objectives / targets (personal / corporate);
• performance which delivers exceptional or priority objectives (which are in themselves challenging, stretching and beyond day to day objectives);
• performance by responding exceptionally to significant unforeseen events; for example, covering for a Director on long term sick, steering the organisation safely through a crisis, etc.

3.32 There must be a robust justification for the bonus being proposed and where it relates to objectives of some kind, then this justification must relate directly to the performance demonstrated in each of those objectives. There should be no presumption that a full bonus should be awarded automatically.

3.33 The percentage bonus being proposed must relate to the level of 'exceptional' performance being rewarded. If a Chair can demonstrate that performance has been 'exceptional' in some way, then a proportion of the maximum potential bonus may be proposed: a bonus may be a percentage up to the maximum potential bonus or anything in between. However, the likelihood is that only where a Chair can demonstrate that a Chief Executive's performance has been exceptional across all objectives might a maximum potential bonus be approved.

3.34 Public bodies must therefore have in place a robust and objective method of assessing 'exceptional' performance and a similarly robust and objective method of translating this into the percentage level of bonus being proposed.

3.35 The method by which the public body calculates the percentage bonus is a matter for them to determine: the pay policy is not prescriptive in setting down the appraisal system or assessment methodology used in determining such performance nor the descriptors used by the public body for various levels of performance. In putting forward proposals for approval, the Chair must be able to demonstrate that the description of 'exceptional' performance can be supported and that the level of the bonus being proposed and how it was arrived at, can be justified.

3.36 For further detail on what is required in order for bonus proposals to be approved please see paragraphs 4.8 to 4.12.

3.37 Public bodies should note the stringent standards and pay policy expectations now in place in relation to bonuses (non-consolidated performance payments). They should therefore ensure appropriate rigour when setting framework of objectives / targets for performance in 2009-10 which might give rise to bonus due in 2010-11.

What is the policy on non-salary rewards?

3.38 There may be a number of additional elements to the remuneration package offered to a Chief Executive over and above base pay. These are referred to as non-salary rewards. Where other staff employed by the public body benefit from such rewards, the arrangements which are to apply to the Chief Executive should be in line with these. Details of any such rewards must be included with any remuneration proposals when seeking Scottish Government approval.

3.39 Possible additional elements include -

Pensions

3.39.1 The pay policy expectation is that the pension arrangements for the Chief Executive should be in line with those for other staff of the public body.

Relocation expenses

3.39.2 Eligibility for and the levels of relocation expenses should be in line with those for other staff of the public body. Exceptionally, relocation expenses beyond such arrangements may be paid but only where this is necessary to secure the best candidate. In such circumstances, public bodies must consult the Finance Pay Policy team before reaching agreement with the incoming Chief Executive.

Cars

3.39.3 Where a Chief Executive is required to travel extensively as part of their duties, it may be cost effective to make arrangements regarding a dedicated car (for example; lease car, car allowance, etc.). Where a public body already has in place an agreed scheme for the provision of cars to staff, any decision to provide the Chief Executive with a car should be in line with that scheme. Where no general scheme exists, a public body must include a business case supporting their proposed arrangements regarding a car when seeking Scottish Government approval of the remuneration proposals. This should include other options considered, for example a pool car. The provision of a dedicated car will only be permitted where there is a clear financial benefit, following approval by the Scottish Government Remuneration Group.

Life cover

3.39.4 In the rare circumstances where a public body offers its staff life cover under an appropriate insurance scheme, the Chief Executive should be eligible to become a member of the scheme. However, public bodies must still provide details of the scheme when seeking Scottish Government approval of the remuneration proposals. In the absence of any scheme, approval will not normally be given for life cover.

Health benefits

3.39.5 In the rare circumstances where a public body offers its staff a private medical plan or similar medical insurance scheme, the Chief Executive should be eligible to become a member of the scheme. However, public bodies must still provide details of the scheme when seeking Scottish Government approval of the remuneration proposals. In the absence of any scheme, approval will not normally be given for a private medical plan or similar medical insurance scheme.

3.40 Brief details of any non-salary rewards must be included in the relevant section of the Excel templates, together with an estimate of the annualised cost of such a provision (if appropriate).

What do you have to do if you want to vary a new remuneration package after it has been approved?

3.41 If, during negotiations with a successful candidate, consideration is given to a remuneration package that differs from the one that has been approved, a public body must seek the advice of the Finance Pay Policy team before any agreement is reached. The Finance Pay Policy team will advise whether approval by the Scottish Government Remuneration Group will be required.

Do you have to seek approval for the terms in a new contract?

3.42 It is a requirement of approval that a public body must consult the Finance Pay Policy teamon the remuneration clauses in the draft contract before it is agreed. The contract must be in line with the Public Sector Pay Policy for Senior Appointments and, in particular, that Scottish Government approval must be obtained prior to implementing annual pay increases or paying any bonus. The public body must give particular care to ensure that the letter of appointment does not give rise to any contractual expectation which goes beyond that in any draft contract or the remuneration package as agreed the Scottish Government Remuneration Group.