Vice-Chancellor Pay

Those in the higher education sector are unlikely to have missed recent press scrutiny over Vice-Chancellor pay. The salaries of those at the very top of our academic institutions are, not for the first time, firmly in the public spotlight.

The debate is naturally emotive on both sides (headlines include 'How many nurses is a University Vice-Chancellor worth?' and "I'm worth my £365,000 salary"). Here, we take a brief look at the decision-making process from a governance and employment law perspective. What are the legal principles and regulatory requirements underpinning the setting of remuneration for senior figures in higher education organisations (HEI)?

Governance and pay

Pay may not be the first thing that springs to mind when considering governance, but codes of governance have quite a bit to say on the topic. This is also an area where some of the general guidance for the charity sector as a whole offers up food for thought for HEIs. This is reflected in HEFCE's recommendations that HEIs follow the principles in two documents in setting salaries:

• The Higher Education Code of Governance published by the Committee of University Chairs which gives guidance on the form and duties of remuneration committees; and
• The 'Good Pay Guide for Charities and Social Enterprises' issued by the Association of Chief Executives of Voluntary Organisations (ACEVO) which comments on how senior salaries sit with the values that form the heart of the not-for-profit sector and expands on its five principles of 'good' pay: transparency, proportionality, performance, recruitment and retention and process.

The new version of the Charity Governance Code published in the summer also contains recommendations on pay and states that charities should publish the process for setting the remuneration of senior staff, and their remuneration levels, on the organisation's websites and in its annual report to demonstrate the organisation's culture of openness.

While these standards of governance are built on charity law principles and the duties imposed on governing bodies (as an institution's charity trustees) to manage the resources of their institution in a prudent fashion, none of these codes are mandatory or have any regulatory force. That said, HEIs are already required to disclose the number and remuneration of higher paid staff (within £10,000 bands) in their annual accounts.

Looking to the future of regulation, and particularly the newly established Office for Students (OfS), time will tell how high up the issue of Vice-Chancellor pay is on the OfS's action list. In a speech on 20 September 2017, Jo Johnson, Minister for Universities, Science, Research and Innovation, cited Vice-Chancellor pay as an area of concern. He outlined his proposals for change which include:

• Requiring governing bodies of HEIs to publish the number of staff receiving salaries of over £100,000 along with justifications for any salaries above £150,000 (although HEIs are already required to make disclosures about staff paid over £100,000 in their annual accounts). Penalties are proposed for failure to do so.
• Requiring the publishing of further data on the levels of HE senior staff remuneration including data on, for example, protected characteristics such as gender and ethnicity.
• New powers for the OfS to investigate the governance of an institution 'through assessments of management effectiveness, economy and efficiency' where there are substantiated concerns.

Johnson also has remuneration committees themselves in his sights. His speech called for greater independence of committees with a call for the sector to work through the Committee of University Chairs to develop and introduce their own Remuneration Code.

It will be interesting to see how these proposals will manifest themselves and whether any mandatory requirements in this area will be imposed on HEIs. Comments such as those made by Jo Johnson are all very well in a public speech but giving this any regulatory force may not prove straight forward.

Reducing Pay: Employment Law Issues

One of the main aims of Jo Johnson (and possibly the OfS) appears to be to reduce Vice Chancellor's salaries. This is all very well and pressure can, of course, be placed on those universities to reduce salaries in future along the lines set out above. It may be that this will have an effect over time and we see salaries being reduced or changed in the long term.

But what of those existing vice chancellors who have significant pay packages which are set out in contracts of employment? Of course, they have legal rights themselves which, as a minimum, extend to the right not to have their salary unilaterally reduced and potentially extends to an agreement not to have their salary disclosed. It would be very difficult for any Government, HEFCE, OfS and Charity Commission "pressure", "guidance" or even legislation to override these contractual rights. It is not dissimilar to some of the public debate about "Bankers' bonuses" and generous pension pay outs on termination – the only bankers who had their contractually agreed benefits reduced were those who did so voluntarily (and there were not many of them).

If an HEI did attempt to forcibly reduce an existing Vice Chancellor's pay and/or benefits, they could face (or be threatened with) an unlawful deduction from wages and/or breach of contract claim from the Vice Chancellor.

What should HEIs do?

At the moment there are no mandatory obligations and there is little to be done practically in relation to current senior contracts. However, this may be a good time to revisit the terms of reference of your remuneration committee and more generally, HEIs may wish to stress test the rigor of the governance processes in place for managing and setting pay for senior staff.

If you are about to enter into negotiations with a new senior member of staff, it would be worth:

• Making it clear as part of negotiations that the University cannot guarantee confidentiality of pay and benefits and disclosure may be necessary in future;
• Considering making the contract terms expressly subject to regulatory approvals and/or amendments;
• Adjusting remuneration packages so that more of the payments are discretionary and performance dependent. This will give HEIs more scope to adjust as needed in a future regime and could assist with evidencing the "management effectiveness, economy and efficiency" tests which may be imposed.

This, of course, is unlikely to be attractive to incoming recruits and will have to be handled sensitively. One justification given for larger salaries is the change in role which makes it more business- or CEO- like – but many CEOs have regulated pay and a wide range of variable and long-term incentives. It may be that it may be that this will be the model of senior pay in the HE sector in future.

If you would like to discuss a similar initiative, please contact Kathleen Heycock or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Higher Education page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, November 2017