Lately, reports of high executive pay, bonuses and severance packages in the charity and education worlds have, once again, hit the headlines. With the third sector coming under increasing scrutiny from politicians and the public alike, Senior Associate Frances Godden considers the effect on charities generally and, in particular, academies, universities and other higher education institutions.

The Telegraph recently revealed that over 270 charities pay their 2,500 senior staff in excess of £100,000 per year, with the highest earner making £4.7 million annually. These range from organisations making a few hundred thousand pounds to multi-nationals with budgets in the billions. In the education sector, the problem appears even more acute, since academy trusts and many higher education providers are exempt charities, falling outside the direct regulatory remit of the Charity Commission.

This investigation prompted comment in the same newspaper by Helen Stephenson, Chief Executive of the Charity Commission, who highlighted the potential to damage public trust in charities and the whole sector, if organisations are unable to justify these enormous pay packages to those who give generously and in good faith to support their work in both time and money. She also made it clear that, whilst the regulator intends to work with charities on the issue of pay, it was “not shy of laying down further requirements, including on pay transparency, if we need to”.

The Charity Commission is due to launch a project later this year “to further improve the public’s ability to hold charities to account, with charities doing more to explain how they are run, and what difference they are making. We want to widen the public’s window into the soul of a charity”.

Ms Stephenson added, "All charities should be able to look donors and volunteers in the eye and say how their decisions about pay impacts on the cause they pursue or the people they help... Being a charity is a privilege. And all charities need to know that they ultimately answer to the public – as donors, volunteers, and taxpayers – for that privilege."

It will be interesting to see how this more robust approach might play out in the world of academy trust and university and college executive pay. The results from the latest Schools Week’s annual CEO pay investigation reveal the creation of a ‘super league’ with almost 100 educational leaders taking home more than the Prime Minister’s annual salary, despite requirements brought in by the ESFA in 2017 for trusts to justify large salaries paid from the public purse, and to reduce them where appropriate.

Certainly in the higher and further education sector, the problem is an acknowledged one, as frequent Charity Commission blogs on the matter testify. Here, research being undertaken by Dr Mary Synge of Exeter University, considers whether the lack of observance of the framework of charity law is perhaps more culturally ingrained, with the existing guidance about payments to trustees and boards needing serious overhaul to reflect the remuneration of vice-chancellors and senior staff. She has asked whether perhaps more internal accountability and oversight would help, with strict approval mechanisms for the payment of bonuses, ex gratia incentives and severance packages.

These are fundamental questions of good governance in the entire third sector which threaten to bring the entirety of our great educational and charitable institutions into disrepute, as well as posing potential risk for serious operational damage and future funding, oversight and credibility. Governing boards and committees must consider their requirement to act always in the best interests of their institutions carefully when weighing up the need to attract teaching staff and those in leadership roles of the highest calibre and ability, against their obligation to act with prudence and reason in setting terms of remuneration and financial and other benefits. Fundamentally, they must also be able to demonstrate that decisions are made within the context of seeking always to achieve and promote their charitable objects.

Birketts advocates regular governance reviews for all our charity and educational clients, so that they are well-placed to demonstrate that a robust process has been followed in recruiting and setting the terms of appointment of any high-earning staff and executives. Awareness of like-for-like third sector as well as commercial benchmarks may provide evidence for justifying a particular package, for example. The Charity Commission is just as – if not more – concerned with ensuring that proper processes have been followed in reaching a particular decision, as it is about the specific outcome in question. Our team is well placed to advise and assist with governance reviews, audits and development of best practice guidance as appropriate.