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Dear Vice-Chancellor

Guidance on severance pay and the remuneration of senior staff

1. There is significant student and public interest in the remuneration of heads of HEFCE-funded higher education institutions (HEIs) and in the severance payments and packages received by those vacating office. Student interest has grown as the funding of higher education (HE) has moved increasingly from government grants to student fee loans, with students taking a greater interest in how this money is used. There is also considerable press interest annually in these matters, with HEIs and other charities being challenged and held to account for high levels of pay for their chief executives. This interest poses questions over the proper use of funds and assets, and may impact on the reputation of the HEI and the HE sector. Here we provide guidance to support governing bodies in their determination of severance payments and the setting of the remuneration of the head of institution and staff earning over £100,000.

2. HEFCE has a regulatory interest in these matters:

  1. Under the Memorandum of Assurance and Accountability (HEFCE 2016/12), which comprises Part 1 of the terms and conditions for payment of HEFCE grants, the governing bodies of HEIs must use public funds for proper purposes and seek to achieve value for money from public funds.
  2. For those HEIs that are charities, whether they are registered or exempt charities, the governors (who are the trustees of the charity) must use charitable funds and assets only to further the charitable purposes of their HEI. This duty applies to trustees' stewardship of all of the charity's funds and assets, not just those that derive from public funds.

3. The guidance below is intended to support governing bodies in delivering their funding, charitable and other regulatory obligations in their determination of severance payments to outgoing senior staff and the setting of the remuneration of the head of institution and staff earning over £100,000.

Compensation for loss of office

4. This HEFCE circular letter replaces previously published HEFCE guidance on severance payments following a review undertaken in the context of changes in the private, voluntary and public sectors.

5. The principles that should apply when decisions are taken about severance payments in HEIs are as follows:

  1. The actions of those taking decisions about severance payments and those potentially in receipt of such payments should be governed by the standards of personal conduct set out by the Committee on Standards in Public Life (the seven Nolan Principles) – these are selflessness, integrity, objectivity, accountability, openness, honesty and leadership.
  2. The decisions about severance payments should be made in such a way as to ensure the accountability of those making the decisions as well as those in receipt of such payments.
  3. As recommended in the Higher Education Code of Governance published by the Committee of University Chairs (available at www.universitychairs.ac.uk/publications/), governing bodies must establish a remuneration committee; this should be composed primarily of independent members of the governing body and include the chair of the governing body, but may co-opt external members to it to ensure that it has appropriate experience available to it. The remuneration committee must propose any severance packages for senior staff and seek legal advice before making its recommendation to the governing body.
  4. In agreeing any severance package, the governing body must consider their responsibilities as charity trustees, particularly the use of charitable funds and assets only to further the charitable purposes of their HEI.
  5. Governing bodies should have regard to the outcomes of the Government’s consultation on reforms to public sector exit payments that are intended to make exit terms fairer, more modern and more consistent; these were published in February 2016 at https://www.gov.uk/government/consultations/further-consultation-on-limiting-public-sector-exit-payments.
  6. Enhancements to severance packages should not as a rule be provided out of public funds. For those HEIs that are charities, governing bodies must be mindful that non-public funds are assets of the charity and should therefore ensure that use of these assets to make severance payments is in accordance with the use of charitable funds only to further the HEI's charitable purposes.
  7. An HEI considering severance payments needs to ensure that it is it is being fair and equitable in its decision-making about different groups of staff.
  8. Compulsory severance packages should be based on contractual entitlements, and any applicable statutory employment entitlements. This means that, when entering into employment contracts, remuneration committees should take care not to expose the institution to excessive potential liabilities.
  9. Negotiations about severance packages and payments should be informed, on both sides, by appropriate legal advice.
  10. When a severance arises following poor performance on the part of an individual, any payment should be proportionate, and there should be no perception that poor performance is being rewarded.
  11. Final-year salaries should not be inflated to boost pension benefits.

6. The final requirement that needs to be considered in greater detail than those set out above concerns the subject of confidentiality clauses. Confidentiality clauses can require both sides not to disclose the terms of the agreement or the circumstances leading up to the severance. In the private sector this is thought, on balance, to be a cost-effective way of resolving disputes to the satisfaction of both sides and allowing the organisation to move on. HEIs also need cost-effective solutions and to be able to move on, but this has to be balanced by public requirements for accountability and openness.

7. Our guidance to HEIs therefore is that compromise agreements that include confidentiality clauses are acceptable but they should be the exception rather than the norm. Any confidentiality clause should not prevent the wider public interest being served, and any undertakings about confidentiality should leave severance transactions open to adequate public scrutiny by the National Audit Office (NAO) and Public Accounts Committee (PAC). This means that both sides in a severance agreement should understand that any information covered by a confidentiality clause will need to be disclosed, if required, to the HEFCE Accounting Officer or the NAO.

8. HEIs are publicly funded and subject to the Memorandum of Assurance and Accountability with HEFCE. Ultimately any inappropriate or improper severance decisions could result in criticism from Parliament. If in doubt, institutions are invited to contact the HEFCE Chief Executive for advice in this area as the Accounting Officer answerable to Parliament for HEIs' use of public funds.

Remuneration of senior staff

9. Remuneration committees should be responsible for the determination of appropriate remuneration of the head of institution and senior officers in an HEI. In so doing, we recommend that the committee should:

  1. Consider the remuneration in the context of charity law – namely the obligation for trustees to use charity funds and assets only to further their charitable purposes
  2. Follow the principles of the Higher Education Code of Governance published by the Committee of University Chairs (see paragraph 5c)
  3. Have regard to the ‘The Good Pay Guide for Charities and Social Enterprises’ guidance for charities issued by the Association of Chief Executives of Voluntary Organisations (available at https://www.acevo.org.uk/good-pay, at the bottom of the page).
  4. Consider legal advice, if the governors feel that this is necessary to inform their decision-making.

Summary

10. The requirements set out above should be sufficient to help remuneration committees make decisions about severance payments and agreements, and about the remuneration of senior officers. We accept, however, that each case is unique and has to be judged on its merits. On occasions it might be difficult, for example, to strike a balance between a particular level of payment and the risk of greater cost should a case end up at an employment tribunal. At the same time, severance payments should not substitute for addressing poor performance. Our advice to governing bodies and remuneration committees is always to bear in mind the principles set out above and to record clearly the rationale behind their decisions, including any divergence from the above guidance.

Yours sincerely

Professor Madeleine Atkins

Chief Executive

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Date: 15 June 2017

Ref: Circular letter 17/2017

To: Heads of HEFCE-funded higher education institutions

Of interest to those
responsible for:

Boards of governors, Audit committees, Remuneration committees, Secretaries and clerks to boards of governors, Finance, Audit 

Enquiries should be directed to:

Jacqui Brasted, tel 0117 931 7389, email j.brasted@hefce.ac.uk