Remuneration: what can we learn from the private sector?

There are lessons to learn from the business world in structuring executive remuneration in the public sector to boost goal clarity and organisational performance.

Incentive remuneration in the public sector shares many attributes with incentive remuneration in the private sector. Both are based on the principle that a significant part of executive reward should be related firstly to organisational performance, secondly to the performance of the business unit in which the executive works, and both last and least to the performance of the executive as an individual.

Both sectors also recognise that incentive remuneration is about rewarding results rather than effort. In the private sector it is even more pointed — such performance should be reflected in returns to shareholders. Shareholders are the owners of the company and therefore are the main stakeholders to whom the board and management are accountable.

There is one attribute of incentive remuneration, however, on which they can be very different: the role of incentives relative to base pay. For example, the Victorian public service executive employment handbook states that executives may receive performance bonuses where they are assessed as exceeding the requirements of their performance criteria. In the private sector, the point of incentive remuneration is to share the performance risk with shareholders with the result that pay is lower when performance is below target and higher when it exceeds target.

Private sector remuneration philosophy concerning incentive remuneration is that the total remuneration package that will be generated when target performance is achieved is the market-competitive target level of remuneration. Thus incentive elements of remuneration are not additional to competitive remuneration, but part of a competitive total remuneration package.

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