| 25 June 2003 |  |
||||||
|
|
Circular letter number 15/2003
For further information contact Paul Greaves, tel 0117 931 7378, e-mail p.greaves@hefce.ac.uk
Dear Vice-Chancellor or Principal
Severance payments for senior staff in higher education
1. The Committee of Public Accounts published its 28th Report, 'Severance Payments to Senior Staff in the Publicly Funded Education Sector', on 14 June 1995. In that report the Committee said that it looked to us to disseminate guidance on severance payments for senior staff (defined as those earning more than £70,000 a year). The guidance was initially issued in 1997 (HEFCE Circular Letter 97/07) and was re-drafted and re-issued in 2002 (HEFCE Circular Letter 21/2002). This letter updates the 2002 guidance.
2. Following the PAC Report, we conducted a survey of severance payments to senior staff in higher education, the preliminary findings of which were published in the National Audit Office report, 'Severance Payments to Staff in the Publicly Funded Education Sector'. From this we concluded that the great majority of institutions had behaved responsibly in dealing with severance arrangements, and that there was therefore no need for complex formal controls. Nevertheless, to address public concerns over severance arrangements and to assure accountability, we believed there was merit in codifying existing and emerging good practice.
3. In 2002, following press and other interest about the salaries of vice-chancellors and principals based on information published in the financial statements of institutions for the period 2000-01, we undertook an analysis of that information. We also entered into correspondence with a small number of chairs of governing bodies to explore the circumstances surrounding particular cases. We were particularly keen to ensure, in respect of severance packages for chief executives, that remuneration committees had followed good practice, that governing bodies had exercised reasonable discretion in their use of public funds, and that our guidance on severance had been followed.
4. Based on that analysis and dialogue, we continue to believe that the majority of institutions conduct themselves in accordance with good practice. However, in part based on this exercise but also following a number of discussions with individual chairs about particular cases, we are taking this opportunity to restate our original guidance. In part we are enhancing or revising our guidance but the core messages remain the same:
- Severance packages should be based on contractual entitlements, and any applicable statutory employment entitlements.
- Negotiations about severance packages should be informed, on both sides, by legal advice.
- Final year salaries should not be inflated to bolster pension benefits.
- With the exception of enhancements based on market rate benchmarking or general wage inflation, all salary increases, including final year awards, should be linked to performance.
- Governing bodies must exercise reasonable discretion in their use of public funds.
- Any enhancements to severance packages which are in recognition of loyal or exemplary service should be explicitly and clearly funded from private income or from funds that are available for use in this way.
- The offer of any enhancements to severance packages from private funds should also be made subject to the reasonable exercise of discretion, and capable of objective justification if necessary.
- If the employing body is a company limited by a guarantee, and a severance package is offered to a director of the company, then written particulars of the proposed payment (including the sum) must be disclosed to the members of the company and approved by the company, if the proposed payment is in excess of the strict legal entitlement.
5. This guidance considers our role in severance arrangements, the principles and policies that should underlie them, possible terms that might be included, and the reporting and auditing of such arrangements. Within this document, the word 'must' indicates a requirement, 'should' denotes best practice, and 'may' indicates a suggestion.
Our role
6. We aim to enable institutions to manage their own financial affairs while encouraging good managerial practice and safeguarding public funds. We recognise that institutions are independent bodies, responsible for setting the terms and conditions of employment for their staff, including severance payments. However, we will consider whether the arrangements made are a proper use of public funds, and in accordance with recognised legal principles, and whether similar decisions would have been taken by a reasonable person. If we conclude there has been a misuse of public funds we are prepared to use all the powers at our disposal to rectify the situation.
Responsibilities of institutions
7. In exercising their discretion in setting terms and conditions of employment, institutions must act reasonably and their actions must be for purposes pertinent to their functions.
8. Severance arrangements for senior staff are sensitive and sometimes difficult matters to discuss, negotiate and agree. Throughout any negotiation those responsible must not only act in accordance with the law but should also bear in mind the principles established by the Committee on Standards in Public Life, namely:
- selflessness
- integrity
- objectivity
- accountability
- openness
- honesty
- leadership.
9. Institutions have a responsibility to use both public and private funds in a prudent way that achieves good value for money. There must be a clear allocation of responsibility to named individuals and committees, proper reporting to governing bodies, and openness and transparency in dealings with all stakeholders. Therefore there should be a clear statement of policy on severance.
Terms of contract
10. Institutions should consider carefully the entitlement to compensation under a particular employment contract in the event of early termination of employment, particularly for unsatisfactory performance. They should give particular regard to any benefits in kind, such as residences, private health care, sabbatical leave entitlements, pensions or the provision of cars.
11. A potential way to avoid large compensation payments is to shorten contracts and notice periods. All contracts, fixed-term or otherwise, should include notice periods of no more than one year. Contracts should contain the provision that the institution can give notice at any time, and for any reason which the institution considers to be valid. Institutions should consult their own legal advisers to ensure that their position is adequately protected in this respect.
12. Institutions may need flexibility to cope with the competitive market within which they operate, particularly when considering fixed-term contracts. The Joint Negotiating Committee for Higher Education Staff (JNCHES) issued guidance on fixed term and casual employment in June 2002. This describes the circumstances in which fixed-term contracts are appropriate and sets out a procedure for terminating such contracts. The guidance is consistent with the Regulations on Fixed-Term Employees that came into force on 1 October 2002, and which require employers to significantly reduce the use of fixed-term contracts. The regulations require that fair and flexible employment arrangements should reflect the following principles:
- equality of opportunity is reflected in all aspects of employment
- indefinite contracts are the general form of employment relationship between employers and employees
- the use of fixed-term and casual contracts is justifiable by objective reasons.
13. The terms of an individual's contract must be the most decisive element in determining the severance arrangements. Institutions must fulfil their obligations in the event of early termination. However, the employee is also under an obligation to reduce or 'mitigate' the amount of compensation required, by finding a new source of earnings. An assumed amount of mitigation should be built into any negotiated compensation sum. Institutions should consider phasing compensation payments over a period and reducing or stopping them when the employee takes a new job. Advice should be taken prior to the early termination of an employment contract.
Termination
14. The reasons for early termination of employment will vary considerably. At one extreme, an individual may have let the institution down badly in some way; in which case the institution should avoid being seen to be rewarding poor performance. Alternatively, the institution's needs may have changed, for example after a merger or restructuring. Institutions may exercise reasonable discretion so that settlements arising from restructuring, say, are more favourable than any arising from poor performance.
15. In some cases an individual may wish to retire early. So long as the rules of the particular pension scheme are adhered to, for example about actuarily reduced entitlements, then such individuals should be free to go. It is their own personal decision about whether they can afford to retire early. A particular governing body may wish to augment the retirement package of such an individual. This may be, for example, because the individual is a distinguished leader who has made a major contribution to the institution. Such sentiment may be reinforced by a general preference to 'refresh' the leadership of the institution; this is not the same as wanting to replace a failing manager. In taking such a decision the governing body should note that any enhancements should not normally be provided out of public funds. The funding should demonstrably be from private income or reserves created from non-public sources, and this will need to be explained in full in the relevant note to the published accounts.
16. Criteria for good or failing performance may not always be easy to establish. However, all institutions should have appraisal procedures documenting job performance, and guidance on other matters relevant to the individual as an employee, such as codes of conduct covering general standards of behaviour. Any such criteria or guidance, supplemented by any previously documented evidence, should be taken into account in negotiating compensation. The terms negotiated will also need to take into account the reasons for termination, the contract, any discounts to allow for the benefit of contractual payments being made in a lump sum, and known or assumed mitigation in respect of subsequent earnings likely to be obtained after the employee leaves the institution.
17. Some institutions use premature retirement as a specific management tool, for managing change, in which case some form of incentive may be necessary. Institutions should strike a balance between the costs of such incentives and the benefits derived. In these circumstances institutions may hold the vacancy created by the premature retirement until the cost of the severance package has been recouped. However, in other instances, such as restructuring, maintaining vacancies would not be appropriate. In any event, institutions should take advice to ensure the Inland Revenue does not treat the scheme as a retirement scheme, in which case there is no tax relief on a proportion of the amount payable to an individual. Institutions should also try to redeploy the member of staff within the institution wherever possible.
Negotiating terms
18. In determining individual settlements, institutions should take legal advice from a competent source: employment law is complex and constantly evolving.
19. As a rule of thumb, public funds should only be used to meet contractual obligations (including formally agreed severance schemes that are part of contractual terms and conditions), and in the exercise of discretion granted to institutions by a specific scheme, such as pension enhancement within the limits set out in the relevant pension scheme rules. Exceptions need careful justification, usually by reference to what gives the best value for money, and the justification needs to be documented carefully. For example, if an institution is advised that it is likely to lose an employment tribunal hearing, it could be more cost-effective to offer to top up payments due under the contract by the estimated cost of the tribunal, and so avoid the hearing altogether.
20. The advice given to us is that institutions do not have the power to use public funds to make payments on the grounds of distress or hurt suffered as a result of the severance agreement.
21. In agreeing individual cases of premature retirement, the full governing body is not usually the right body to give approval for specific settlements, although it can set out the limits of authority that it is prepared to delegate. Institutions should delegate such a task to their remuneration committee (or its equivalent), or to a specific committee set up for that purpose. Delegation must be within a specific remit, with clear boundaries determined by the governing body. Institutions should ensure that the overall financial aspects of severance packages are reported to the relevant finance or resources committee. Governing bodies must also be given the appropriate formal reports on severance payments to enable them to fulfil their responsibilities.
22. Remuneration committees or their equivalent should oversee severance arrangements. They should do so in the context of a policy that sets out general principles covering all severance packages. It is unlikely that precise formulae can be devised to cover all senior staff in all circumstances. Nevertheless, the policy should clearly set the boundaries of delegated authority for relevant individuals. For example, an institution might have a policy that severance should normally be based on the maximum of contractual obligations plus a set enhancement of pension rights, plus out-placement counselling up to a fixed sum. Any settlements in excess of this would then need to be specifically approved by the remuneration committee. Guidance on the role of remuneration committees is provided in the CUC guide for members of governing bodies (HEFCE 01/20) paragraphs 4.43 to 4.45.
23. Institutions may find it useful, especially in negotiated severance cases without internal precedent, to seek comparative information from other institutions within the sector. However, neither schemes nor individual packages should be made up of elements picked from a range of other bodies if the net effect is a significantly more generous package than would be available at any of those bodies.
24. Institutions should avoid negotiating a settlement and then seeking to justify it retrospectively. Instead, they should establish contractual obligations, and any discretionary elements and relevant limits, and set out the relevant criteria, before starting negotiations. A written record should be maintained at each stage of negotiations to ensure that the ultimate settlement can be readily audited.
25. Institutions have the discretion to provide compensation for untaken contractual holiday entitlement. However, they should ensure that they have leave records to support any such payment. Usually such untaken holiday entitlement should be required to be taken during any notice period served.
26. Institutions should not give unrealistic references to senior staff as part of a severance arrangement, nor make open-ended commitments, such as undertaking to protect an individual's reputation.
27. Institutions must not agree to confidentiality clauses within any severance agreements except where it is necessary to protect commercially sensitive information. Commercially sensitive information does not include information on the details of the severance package itself, nor generalised clauses whereby individuals undertake not to make statements that might damage the reputation of an institution. However, there may be exceptional cases not covered by commercial considerations, where it is in the public interest to include a confidentiality clause. In these circumstances the institution must consult with me as HEFCE chief executive, in my capacity as Accounting Officer, before agreeing to such a clause.
28. Institutions should seek an indemnity to protect themselves from any demand for tax which might be made against the institution arising out of the employee's default after the severance agreement has come into force.
29. If institutions enter into severance agreements they should not offer further work of a consultancy type to the individual. There are isolated occasions when this might be desirable. For example, individuals may be needed part-time to see through a cohort of students, or may be engaged in a specific project that requires completion. Any subsequent re-employment of an individual should take into account all severance arrangements, and be on the basis that the individual is no better off than he or she would have been if the severance deal had not been made. In the case of consultancy contracts offered to retiring chief executives and others it is difficult to identify such benefits, and the perception is of an attempt to disguise a pay-off.
Audit
30. Internal auditors should assess whether severance payment terms constitute a risk to the institution, and if so should undertake a programme of work and prepare a report.
31. Severance settlements for senior staff must be reviewed by the institution's external auditors and assessed for reasonableness and compliance with this guidance. Such a review will normally take place after settlements have been agreed, and should be done by senior audit staff because of the complexity and sensitivity of the issues.
32. If final settlements do not materially conform to the guidance in this document, external auditors should report the facts to the institution in their management letter. If auditors become aware of a proposed settlement that does not materially conform to this guidance, they should first inform the management of the institution and, if the auditors judge it desirable, members of the governing body. The auditors should also recommend the institution to inform us. Only if the institution refuses to do so should the auditors report the proposed settlement directly to us.
Yours sincerely
Howard Newby
Chief Executive
Last updated