Senior NHS managers will be spared the pay cut that will face their colleagues as market facing pay is introduced in April 2013. This will result in a widening of the pay differential by up to 10 per cent.

The Government argues that differentials between public and private sector wages vary considerably between local labour markets and this has the potential to hurt private sector businesses that need to compete with higher public sector wages. It leads to unfair variations in public sector service quality and reduces the number of jobs that the public sector can support for any given level of expenditure. The Government’s case is based on research by the Institute of Fiscal Studies, which shows that public sector staff are paid 10% more than their private counterparts in some parts of the country.

As with any change, the devil is in the detail and there are always undesigned outcomes. When the NHS looked at pay levels of senior managers earning on average £120,000 per year they found that the majority of employers in the private sector do not vary pay according to location for staff at senior levels. They also discovered that the leaders of organisations of comparable size in the private sector are paid at much higher levels.

The NHS also received advice that if regional vacancies were to be advertised at a lower pay level, the recruitment pool would be restricted.

Although the NHS announcement of abandoning market facing pay for top posts is presented as a minor issue with insignificant financial implications, it will impact on staff on lower salary scales and across the public sector. There are many NHS staff who earn substantial salaries, but less than £120,000. The evidence for re-designing pay arrangements is likely to show that the private sector does not vary pay at lower levels and that they pay their managers more than the public sector.

There will be a break point where the private sector does base pay on a regional basis and where they pay less than the public sector. Below this point, market facing pay will result in a widening of the differential between upper and lower pay levels. Should the IFS estimate prove to accurate, it will mean that the differential will increase by 10 per cent.

Pay Review bodies for central and local government will have to decide how they are to respond to the situation because they are all in the same market.