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TABLE OF CONTENTS

• ABBREVIATIONS AND ACRONYMS
• INTRODUCTION
• LITERATURE REVIEW
• THEORETICAL PART
• Section 1. Pay composition and pay structures
• Section 2. Theoretical Analysis of Civil servants pay differentiation
• Section 3. Possible ways of optimization civil servants' pay differentiation
• PRACTICAL PAPT
• Section 4. Civil servants' pay in the Federal Executive Bodies of the Russian Federation
• Section 5. Comparative analysis of civil servants' pay differentiation in Central government of Russia and OECD countries
• Section 6. Regression analysis of the main determinants of civil servants' pay differentiation
• CONCLUSIONS
• RECOMMENDATIONS
• BIBLIOGRAPHY
• APPENDIXES


ABBREVIATIONS AND ACRONYMS

CIPD - Chartered Institute of Personnel and Development

CPI - Consumer Price Index

EU - European Union

FA - Federal Agency

FEBs - Federal Executive Bodies

FM - Federal Ministry

FS - Federal service

GDP - Gross Domestic Product

ICLRR - Institute for Comparative Labour Relations Research

IDS - Income Data Services Ltd

IPAMM NRU HSE - Institute of Public Administration and Municipal Management of NRU HSE

NRU HSE - National Research University Higher School of Economics

OECD - Organisation for Economic Co-operation and Development

PPP - Purchasing power parity

PRP - Performance related pay

SCS - Senior Civil servants

TUC - Trade Union Collection

UK - United Kingdom and Northern Ireland

VCIOM - The All-Russian Public Opinion Research Center

Abbreviations and Acronyms of Russia's Federal Executive Bodies

Emercom - Ministry of the Russian Federation for Civil Defense, Emergencies and Elimination of Consequences of Natural Disasters

FAS - Federal Antimonopoly Service of the Russian Federation

FDCS - Federal Drug Control Service of the Russian Federation

FMBA - Federal Bio-Medical Agency of the Russian Federation

FMS - Federal Migration Service of the Russian Federation

FNS - Federal Tax Service of the Russian Federation

FSFR - Federal Service for Financial Markets of the Russian Federation

FSIN - Federal Service for the Execution of Sentences of the Russian Federation

FSMTC - Federal Service for Military-Technical Coperation of the Russian Federation

FSSP - Federal Bailiff Service of the Russian Federation

FST - Federal Tariff Service of the Russian Federation

FTS - Federal Customs Service of the Russian Federation

GFS - State Courier Service of the Russian Federation (Federal Service)

Leshoz - Federal Forestry Agency of the Russian Federation

MID - Ministry of Foreign Affairs of the Russian Federation

Mincult - Russian Ministry of Culture

Mineconomrazvitiya - Ministry of Economic Development of the Russian Federation

Minenergo - Ministry of Energy of the Russian Federation

Minfin - Ministry of Finance of the Russian Federation

Minjust - Ministry of Justice of the Russian Federation

Minkomcvyaz - Ministry of Communications and Media of the Russian Federation

Minobrnauki - Ministry of Education and Science of the Russian Federation

Minprirody - Ministry of Natural Resources and Environment of the Russian Federation

Minpromtorg - The Ministry of Industry and Trade of the Russian Federation

Minregionrazvitiya - Ministry of Regional Development of the Russian Federation

Minselhoz - Ministry of Agriculture of the Russian Federation

Minsporttourism - Ministry of Sport and Tourism of the Russian Federation

Mintrans - Ministry of Transport of the Russian Federation

Minzdravsotsrazvitiya - Ministry of Public Health and Social Development of the Russian Federation

Rosalkogolregulirovanie - Federal Service for the Regulation of the Alcohol Market of the Russian Federation

Rosarhiv - Federal Archive Agency of the Russian Federation

Rosaviatsiya - Federal Air Transport Agency of the Russian Federation

Rosavtodor - Federal Highway Agency of the Russian Federation

Rosfinnadzor - Federal Service for Financial and Budgetary Supervision of the Russian Federation

Rosfinmonitoring - Federal Service for Financial Monitoring of the Russian Federation

Rosgidromet - Federal Service for Hydrometeorology and Monitoring of the Environment of the Russian Federation

Rosgranitsa - The Federal Agency for the Development of the State Border Facilities of the Russian Federation

Rosimuschestvo - Federal Agency for State Property Management of the Russian Federation

Roskomnadzor - Federal Service for Supervision of Telecom, Information Technologies and Mass Communications of the Russian Federation

Roskosmos - Federal Space Agency of the Russian Federation

Rosmolodoj - Federal Agency for Youth Affairs of the Russian Federation

Rosmorrechflot - Federal Marine and River Transport Agency of the Russian Federation

Rosnedra - Federal Agency on Mineral Resources of the Russian Federation

Rosoboronpostavka - Federal Agency for Weaponry, Military and Special Equipment and Material facilities Procurement of the Russian Federation

Rosoboronzakaz - Federal Service for Defence Order of the Russian Federation

Rosobrnadzor - Federal Service for Supervision in the Sphere of Science and Education of the Russian Federation

Rospechat - Federal Press and Mass Media Agency of the Russian Federation

Rospotrebnadzor - Federal Service on Customers' Rights and Human Well-being Surveillance of the Russian Federation

Rosprirodnadzor - Federal Service for Supervision of Natural Resource Management of the Russian Federation

Rosreestr - Federal Service for State Registration, Cadastre and Cartography of the Russian Federation

Rosrezerv - Federal State Reserve Agency of the Russian Federation

Rosrybolovstvo - Federal Agency for Fishery of the Russian Federation

Rosselkhoznadzor - Federal Service for Veterinary and Phytosanitary Surveillance of the Russian Federation

Rossotrudnichestvo - Federal Agency for Commonwealth of Independent States Affairs of the Russian Federation

Rossrandart - Federal Agency for Technical Regulation and Metrology of the Russian Federation

Rosstat - Federal State Statistics Service of the Russian Federation

Rossvyaz - Federal Agency of Communications of the Russian Federation

Rostransnadzor - Federal Transportation Inspection Service of the Russian Federation

Rostrud - Federal Service for Labour and Employment of the Russian Federation

Rosvodresursy - Federal Agency for Water Resources of the Russian Federation

Roszdravnadzor - Federal Service on Surveilance in Healthcare of the Russian Federation

Roszheldor - The Federal Agency for Railway Transport of the Russian Federation

Russiatourism - Federal Agency for Tourism of the Russian Federation

Spetsstroi - Federal Special Construction Agency of the Russian Federation

Treasury - Russian Federal Treasury of the Russian Federation (Federal Service)

UDP - Directorate of the President of the Russian Federation (Federal Agency)

Abbreviations and Acronyms of UK's Civil Service Departments

BIS - Business, Innovation and Skills Department

CEFAS - Centre for Environment Fisheries and Aquaculture Science

COI - Central Office of Information

DCLG - Department for Communities and Local Government

DCMS - Department for Culture Media and Sport

DECC - Department for Energy and Climate Change

Defra - Department for Environment Food and Rural Affairs

DfE - Department for Education

DFID - Department for International Development

DFT - Department for Transport

DH - Department of Health

DSG - Defence Support Group

DSTL - Defence Science and Technology Laboratory

FCO - Foreign and Commonwealth Office

Fera - Food and Environment Research Agency

GCDA - Government Car and Despatch Agency

HA - Highways Agency

HMCS - HM Courts Service

HMRC - HM Revenue and Customs

HMT - Her Majesty's Treasury Department

HSE - The Health and Safety Executive

IPS - Identity and Passport Service

JP - Jobcentre Plus

LR - Land Registry

MCA - Maritime and Coastguard Agency

Met - Met Office

MHRA - Medicines and Healthcare Products Regulatory Agency

MOJ - Ministry of Justice

NA - National Archives

NMO - National Measurement Office

NS&I - National Savings and Investments

NOMS - National Offender Management Service

Ofgem - Office of Gas and Electricity Market

OFSTED - Office for Standards in Education

OFT - Office of Fair Trading

Ofwat - Office of Water Services

ONS - Office for National Statistics (executive office of StatsAuth)

ORR - Office of Rail Regulation

OS - Ordnance Survey

Postcomm - Postal Services Commission

StatsAuth - United Kingdom Statistics Authority

UKBA - UK Border Agency

VLA - Veterinary Laboratories Agency

VOA - Valuation Office



INTRODUCTION

Nowadays the image of civil service poses a major economic challenge. In spite of the widespread reforms of public sector, this issue still remains relevant in different countries. One of the most significant reasons of public sector inefficiency is the large pay gap between private and public sector. There is a tension between seeking coherence of pay differentiation on the one hand, and seeking to change pay levels relativities on the other (IDS, 2010). Moreover, there are different types of pay differentiation inside the public sector. Considering that employee compensation plays an important role in attracting, motivating and retaining qualified workers for jobs in the government, these challenges lead to the widespread phenomenon of adverse selection of civil servants. In this context, the ways of optimization of civil servants' pay differentiation is of considerable interest.

Challenges mentioned beg the following research questions: Is civil servants' pay differentiation justified? What determinants lie in the basis of civil servants' pay differentiation? Can civil servants' pay differentiation be attributed to any of the observable factors?

The aim of the thesis is to evaluate the level of Russian civil servants' pay gaps and pay differentiation and to identify the factors which can explain it.

The scope of the study is considered to be the civil servants of the central apparatus of State Federal executive bodies of the Russian Federation.

In order to achieve the aim of the thesis, the following tasks should be performed:

· To review civil servants' pay systems and main theories of pay differentiation;

· To analyze the existing ways of optimization of civil servants' pay differentiation in different countries;

· To investigate peculiarities of civil servants' pay system in the Russian Federation;

· To estimate pay gaps, pay differentiation and pay compression of Russian civil servants in the Federal executive bodies;

· To compare the level of civil servants' pay differentiation in Russia and OECD countries;

· To evaluate the main determinants of civil servants' pay differentiation by means of regression analysis;

· To propose recommendations of pay differentiation' feasibility of Russian civil servants in the Federal executive bodies.

Taking into account the problem identified, the author has put forward a hypothesis, that there are some specific factors which influence the level of civil servants' pay differentiation in Federal executive bodies of the Russian Federation.

The novelty of the thesis consists in:

· Identification of civil servants' pay differentiation determinants from theoretical models and practical cases;

· Consideration of possible optimization mechanisms appropriate for particular type of civil servants' pay differentiation;

· Estimation of pay gaps, pay differentiation and pay compression of Russian civil servants in the Federal executive bodies;

· Evaluation of determinants influences on civil servants' pay differentiation;

· Recommendations for improvement civil servants' pay system.

The application of proposal mentioned can help to implement the proper economic policy on the state level in order to avoid the problem of negative selection of future civil servants and to increase the motivation of current civil servants. The analysis carried out in the frames of this research leaves a room for the further research on the same subject.

Taking into consideration the width of the problem investigated, the research is based on the cross-sectional study of pay determinants and their impact on pay differentiation. The theoretical analysis is mainly based on the review of working papers and articles from academic peer-reviewed journals and conferences. The practical part is based on the quantitative analysis of available statistics of Federal State Statistics Service of the Russian Federation, Common Government Services Portal of Russian Federation, Institute of Public Administration and Municipal Management of NRU HSE. Additionally, the data from the Ministry of Economic Development and Ministry of Finance of the Russian Federation have been employed.

The following research methods have been applied in developing of the master's thesis:

· analysis of the theoretical framework;

· documentary research;

· observational research;

· correlational research;

· comparison analysis;

· statistical and graphical analysis.

The main limitation of this research consists in its scope. Only civil servants of the central apparatus of State Federal executive bodies (FEBs) of the Russian Federation have been considered. These executive bodies have been chosen on purpose to capture more comprehensive and objective results of the research, which is based on organisations with different structure, functions and powers. Furthermore, statistical data, essential for practical part of the research, are available only for central apparatus of FEBs and only for 2011. However, the author would like to point out that if the sample size of research including the territorial form of government is expanded, the final conclusions can be significantly modified.

The structure of the thesis is as follows. In literature review the extent of research background of the topic is examined. The Theoretical part provides a brief overview of public sector pay structures theory and the theory of civil servants' pay differentiation as well as the ways used in different countries for optimization different types of civil servants' pay differentiation. The Practical part continues with the international comparison of civil servants' pay differentiation and the analysis of Russian civil servants' pay system peculiarities. The next section provides the regression analysis of the main determinants of civil servants' pay differentiation. Finally, the author comes to the conclusion and recommendations on improvement of the feasibility of Russian civil servants' pay differentiation.

All the acronyms and abbreviations are explained in the separate list of terms. The details of the research methodology and the construction of the variables used in the study are given in the practical part. Translations from other languages and calculations have been made by the author, unless otherwise noted.



LITERATURE REVIEW

It is worth emphasizing that the analysis of public sector labour market has not attracted much attention in academic community, and the number of studies which have attempted to explain public sector pay differentiation is rather limited. However, there are some separate sections of literature which partly cover this topic. One such part of literature determines main components of pay (Hay group, 2003; Mukherjee, 2003; Kessler, 2005; O'Riordan, 2008; Perkins, et al., 2008; Tischenko, 2012), general categories of pay structures (Mukherjee, 2003; Wright, 2004; Armstrong et al., 2005; Risher, 2005; O'Riordan, 2008; Perkins, et al., 2008; CIDP, 2012) and methods of pay progression (Woodfruffe, 1991; Recardo et al., 1996; Heery et al., 2001; IDS, 2006). Another part explains theoretical models of pay differentiation (Ricardo, 1817; Fisher, 1927; Marshall, 1980; Katz, 1986; Rosen, 1986; Becker, 1994; Lykianova, 2007; Napari, 2007; Oschepkov, 2007a; 2007b; Karabchuk et al., 2013) which can be partly applied to the analysis of civil servants' pay differentiation.

Concerning the practical aspects, pay differentiation has been a construct of study for many researchers in different areas during the last twenty years (see Figure 1).

Figure 1. The number of published and cited items on pay differentiations in different areas of study



However, public sector pay differentiation has been given relatively little attention in the large empirical literature on wage differentials (see Figure 2).

Figure 2. The number of published and cited items on public sector and civil servants' pay differentiation

Resource: academic citation indexing Web of Knowledge

The difference in research background of pay differentiation over different areas of study during the last twenty years is illustrated in Table 1. This citation summary table shows that literature on public sector pay differentiation accounts only for 5 per cent of the whole literature on this topic.

Table 1.

Research background of the topic of pay differentiation

Indicators	Pay differentiation in different areas of study	Pay differentiation in public sector
Results found	1088	55
Sum of the Times Cited	12172	454
Sum of Times Cited without self-citations	9929	429
Citing Articles	8024	429
Citing Articles without self-citations	7338	411
Average Citations per Item	11.19	8.25
h-index	49	12



To sketch the deeper outlines on the public sector pay differentiation, the following literature resources have also been used: OECD publications (1996; 2004a; 2004b; 2005a; 2005b; 2005c; 2008; 2011), Hay group publications (2003; 2006; 2007; 2008), IDS publications (2006; 2009; 2011a; 2011b, 2012), CIPD publications (2001; 2012) and TUC library publications (Gregory et al.,1990; Patterson, 1990; Thompson, 1993; Booth et al., 1997; Heery, 1997; Holroyd, 1998, Mardsen et al., 1998; Neathey, 1998; Patterson et al., 1998; Suff et al., 1998; Ozaki, 1999; Mardsen et al., 2001; Pircell et al., 2003; Wright, 2004; Bebchuk et al., 2006; Perkins et al., 2008; and Bryson et al., 2012).

Taking into account that the scope of the study is limited by the civil servants of the State Federal executive bodies, considerable attention was given to the literature on pay differentiation among public sector organisations. The common finding is that there is a huge pay gap between public and private sector. This has been documented by the following authors: Craig, 1995; Henley et al., 2001; Bender et al., 2002; Christofidesa et al., 2002; McDonnell et al., 2005; Melly, 2005; Dell'aringa et al., 2007; Elish et al., 2009; Baron et al., 2010; Nadeau, 2010; Cai et al., 2011; Imbert, 2013.

Moreover, there are different types of pay differentiation on the inside of public sector. This has been investigated by Lokshin et al., 2003; Lucifora, 2004; Garcia-Perez et al., 2007; Postel-Vinay, et al., 2007; O'Riordan, 2008; Jefferson et al., 2010; Bozio et al., 2011; Emilio et al., 2012; Siminski, 2013.

In line with the currently dominant perspective in the more general literature cited above, the most influential interpretation is that the differences are due to the jobs or work structures; Stokey, 1980; Maume, 1999; Chevaillier, 2001; Bender et al., 2002), IDS, 2006; Lawlor et al., 2009.

Furthermore, according to many researchers, the main factors of public sector pay differentiation are gender (Martin et al., 1993; Lewis, 1996; Cohen et al., 1997; Mastekaasa et al., 1998; Siphambe et al., 2001; Meier et al., 2002; Gibelman, 2003; Jurajda, 2003; Machin et al., 2003; Alkadry et al., 2006; 2011; Thornley, 2007; Hubler, 2009; Lewis et al., 2009; Miller, 2009; Wahlberg, 2010; Bolitzer et al., 2012; Baron et al., 2010; Fuller, 2005; Pena-Boquete et al., 2010; Reese et al., 2011), education (Machin et al., 2003; Gimpelson, 2007; Kuepiea et al., 2009) and ethnics (Maume,1999; Grodsky et al., 2001; Semyonov et al., 2009).

The main findings of the most cited articles on pay differentiation in public sector organisations are presented in Appendix2.



THEORETICAL PART

Section 1. Pay composition and pay structures

Before we embark on the very nature of civil servants' pay differentiation, it is essential to consider pay components and pay structures to gain insights on the process of pay formation. This part will explore the composition of pay, different types of pay structure and various criteria used to make decision about pay progression.

Looking at the basics, it is required to briefly discuss the term “employee reward”. According to Kessler (2005), employee reward represents one of the central pillars supporting the employment relationship. Such terms as employee “reward”, “compensation” or “remuneration” may be used interchangeably in the literature and defined as “all forms of financial returns and tangible services and benefits employees receive” (Perkins, et al., 2008). Moreover, “total reward” includes both financial and non-financial rewards, which play a great role for civil servants. As the chart below shows, the total reward package of civil servants (cells 1 to 9) consists on a combination of current rewards and future expectations, as well as contractual and intangible rewards (see Table 2).

Table 2.

Components of civil servants' rewards

Resource: Mukherjee, R. (2003)

Base pay (sell 1) is the fixed part of civil servants' remuneration and is usually the guaranteed and contractual part. It is usually linked to the employee's position and is uniform across similar positions. In addition to base pay, civil servants receive allowances (e.g. transport, housing, telephone, travel), which can be provided in cash (cell 4) or in kind (cell 5). In-kind rewards could also be provided across the board to all civil servants (see cell 2). It is necessary to note, that the proportion of allowances to base pay varies widely across countries. Moreover, civil servants can count on pension (cell 7) and a lump-sum gratuity among retirement benefits. Furthermore, in OECD countries many retirees receive land or a house either free or at very subsidized prices (cell 8). Beyond these current and future benefits, civil servants can get additional benefits (cells 3, 6 and 9) to which it is difficult to attach price tags (Mukherjee, 2003).

Other important factors of civil servants' reward components classification are fixed and variable payments, which can be guaranteed and unguaranteed (Tischenko, 2012). As illustrated in Table 3, all components of civil servants' reward in OECD countries can be linked with different appraisals: performance appraisal or competencies and experiences appraisal (see Table 3).

Table 3.

Fixed and variable components of civil servants' reward in OECD countries

	Fixed Components	Variable Components
Guaranteed Payment	Base salary	Grade salary Rewards Non-consolidated bonuses	Competences and Experiences Appraisal
Unguaranteed Payment	Allowances Rates for the job Consolidated base pay awards	Pay increments Premiums Bonuses Result-based rewards Pay at risk	Performance Appraisal

The following reward classification was adopted by Hay Group (2003) via so called Engaged Performance Model for Senior Civil Servants (SCS). This model (see Figure 3) makes clear the reality that rewards go well beyond pay and benefits into the elements of working life that attract SCS members to commit to a civil service career.

Figure 3. The Rewards Available for working in the SCS

Resource: Hay Group, 2003

All mentioned elements of civil servants reward are combined in different types of pay structures. By definition of CIDP (2012), pay structure is a “collection of pay grades, levels or bands, linking related jobs within a hierarchy or series, which provide a framework for the implementation of reward strategies and policies within an organisation”. According to O'Riordan (2008), pay structure provides the overall architecture of the reward system. Moreover, they are also used as a process for mapping career paths without any direct reference to the pay implications (O'Riordan, 2008, p. 2).

The literature on pay structures (Mukherjee, 2003; Wright, 2004; Armstrong et al., 2005; Risher, 2005; O'Riordan, 2008; Perkins, et al., 2008; CIDP, 2012) identifies five general categories: narrow graded, pay spines, broadbanded, career families and job families. Brief definitions of different types of pay structures are set out below. Indeed, broadly speaking, pay structures may be distinguished in particular by two key characteristics:

· the number of grades, levels or bands within the structure;

· the width, or span, of each grade - that is the percentage difference between the lowest and highest pay rates attached to each grade or band.

Narrow-graded pay structures comprise a large number of grades, at minimum around eight, with jobs of broadly equivalent worth slotted into each of the grades (CIDP, 2012, p.3). A pay range is attached to each grade, with the maximum of each range typically between 20 per cent and 50 per cent above the minimum. Differentials between pay ranges are typically about 20 per cent. The overlap between ranges provides some flexibility to recognise individual contribution of employees. This form of pay structure is appropriate for large bureaucratic organisations with well-defined hierarchy, which need in rigid control (Armstrong et al., 2005, p. 196). However, because there are too many narrow grades, most employees reach the top of the pay range for their grade fairly quickly, potentially leading to demands for upgrading and grade drift. O'Riordan (2008) argues that in such system jobs are being ranked more highly than justified.

Broad-graded pay structures are closer in concept to narrow graded structures, but makes use of fewer grades (from six to nine). Therefore, it can help counter the problem of grade drift. However, the increased width of grades can also lead to pay drift, with employees expecting to reach the upper pay limit of a grade. In order to counterbalance this, some organisations have incorporated threshold controls (pay cannot increase without achieving a defined level of competence) and zone controls (dividing the grades into segments or zones). These types of structures are sometimes included within a definition of `broadbanding' (CIDP, 2012).

Broadbanding means that the number of grades is compressed into a relatively small number (often four or five) in which pay is managed more flexibly than in a conventional graded structure (O'Riordan, 2008, pp. 22-23). A classic broadbanding arrangement would place no limits on pay progression within each band. The difference between the maximum and minimum salary available within a band may be as high as 100 per cent. Despite the fact, that broadbanding is suitable for process-based, flexible organisations, it may unwarrantedly raise expectations of pay opportunities. For employers, broadbanded structures tend to be more difficult to manage (Risher, 2005). In addition there is a concern that broadbanding can lead to equal pay problems. The broader pay ranges within bands mean that they include jobs of widely different values or sizes, which could result in discrimination (Armstrong, et al., 2005, pp. 199-200).

Pay spines are broadly similar to narrow graded structures and are found in the public sector and voluntary organisations. Pay spines consist of a series of incremental pay points aligned to job grades that usually allow for service-related pay progression. Typically pay spine increments represent a salary increase of 2.5 to 3 per cent. This system is easy to manage, because pay progression is not based on managerial judgement. However, O'Riordan (2008) argues that relating pay almost entirely to service means that people are rewarded not for the value of their contribution.

In career family structures jobs are grouped together into families with similar functions or occupations such as finance, IT, administration or support services, which are related through the activities carried out and the basic knowledge and skills required. However, the levels of responsibility, knowledge, skill or competence needed in career families differ (Armstrong, et al., 2005, p. 202). Good career progression is a positive feature of this system. It also facilitates the achievement of equality between families and therefore an equal pay (O'Riordan, 2008, p. 80). The principal difficulty is the complexity of such system.

Job families system groups jobs within similar occupations or functions together, usually with around six to eight levels. This system is useful when distinct group of jobs need to be rewarded differentially. Whereas career families are focused on an occupation or function, job families are typically based on common processes. For example IT, finance and HR and legal jobs would be identified as separate in a career family structure, but a job family approach might combine all these roles into a `business support' family. This approach may be helpful in facilitating higher rates for highly sought-after workers. Nevertheless, it can be divisive and may inhibit lateral career development (O'Riordan, 2008, p. 80).

What clearly emerges from a review of the literature is that no perfect framework has been developed within which an organisation's pay policies can be managed (O'Riordan, 2008, p. 47). In this context, it is worth to underline the significance of Armstrong's and Murlis' criteria, which suggest that grade and pay structures should:

· be appropriate to the culture, characteristics and needs of the organization and its employees;

· facilitate the management of relativities and the achievement of equity, fairness, consistency and transparency in managing grading and pay;

· be capable of adapting to pressures arising from market rate changes and skill shortages; facilitate operational flexibility and continuous development;

· provide scope as required for rewarding performance, contribution and increases in skill and competence;

· clarify reward, lateral development and career opportunities;

· be constructed logically and clearly so that the basis upon which they operate can readily be communicated to employees;

· enable the organization to exercise control over the implementation of pay policies and budgets (cited in Armstrong et al., 2004, p 196).

Deciding what and how to pay the employees in various pay structures is a further reward decision. Pay levels are attached to the bands or grades, and decision must be made about later pay progression. Progression between grades is normally though the process of promotion, often along the same lines as any recruitment process (Perkins et al., 2008, p. 152). In contrast, progression within the grade can be contingent by the following criteria: service or seniority, age, performance, competencies, skills and labour market conditions.

Method of pay progression according to length of service or seniority assumes that length of service equals improved knowledge and experience. Pay costs in such system are relatively predictable and the level of stuff turnover is low. Inefficiency of such system, which used mostly in public sector organisations, is linked with encouragement of “time-serving” behaviour among employees. In this case poor performance is treated equally with good performance, which demotivates employees (IDS, 2006).

In case of age-related method of progression pay rates are attached to specific ages. This system provides the progression route for younger workers, especially in periods of training or apprenticeship (Perkins et al., 2008, p. 160).

The other method of pay progression is on the basis of performance. It should be noted that term “performance related pay” (PRP) is used in two senses. First, it describes the broad class of pay systems which relate pay to some measure of employee performance. Second, it refers to individualised pay progression which depends on the results of some performance appraisal. Perkins and White (2008) emphasized the following major ways in which pay is linked to pay progression:

· through the award of additional performance-related increments on top of an essentially service-based progression system;

· through all incremental progression within the grade based on performance ratings;

· through “all merit” annual pay increases where the increase will range in size according to the individual performance rating (Perkins et al., 2008, p. 175).

Yet another method of individualised pay progression relates salary progression to the display of “competencies”, which encourages career development. It is necessary to note that some researchers (Woodfruffe, 1991) underline the difference between the very notions of “competence” and “competency”, and in turn there is the difference between competence-based and competency-based pay progressions. Competence refers to the areas of work is competent. Therefore, most competence-based pay systems refer both to inputs and outputs. Competency is a wider concept refers to the behaviours that underpin “competent performance”. Thus, competency-based pay systems assess the extent to which employees meet or exceed the expected level of competent performance for their role in particular organisation or job.

Another way of linking pay progression to acquisition of designated skill level is skills-based pay or knowledge-based pay. According to Heery and Noon (2001), it is an input-based payment system where increases in pay are linked to undergoing training and additional skills. Recardo ans Pricone (1996) identify the following categories of skills and knowledge enrichment: vertical (input/output within a single job), horizontal (complementary skills across several jobs), depth (skills specialisation), basic (expertise of skills and knowledge).

The last method of pay progression is market-based pay, which links pay progression with the conditions of wider economy in order to be competitive within the external labour market.

Furthermore, Perkins and White (2008) identify some hybrid types of pay progression:

· service plus performance with progression according to annual increments;

· performance plus skills or competency with progression according to performance, but also with link to skills acquisition.

Thus, a brief overview of public sector pay structures theory, provided in this section, partly explains the framework of differentiation in pay structures. In order to understand additional reasons of civil servants pay differentiation, the theoretical background of such phenomenon will be considered in the following section.



Section 2. Theoretical Analysis of Civil servants pay differentiation

This section provides an overview of theoretical reasons of civil servants pay differentiation. Drawing on the literature in the area, the theories of civil servants pay differentiation are discussed and different types of pay differentiation are reviewed.

Before looking at these matters, it is essential to make clear the notion of civil servants pay differentiation. In extended sense pay differentiation can be defined as “different levels of civil servants earnings according to some factors” such as qualification, industry, labour conditions, etc. Depending on each factor influenced on the level of pay differentiation this term can be defined in different ways. Moreover, the definition of pay differentiation is often related to the particular components of pay. For example, according to Collins Dictionary, wage differentiation is “the difference in wages between workers with different skills in the same industry or between those with comparable skills in different industries or localities”. In Great Soviet Encyclopedia it is the “setting of different wage levels for different employee categories in individual sectors of the national economy and regions of the country”.

The most commonly applied theoretical framework in the literature estimating the pay differentiation is based on the following theories:

· Opportunity cost theory;

· Human capital theory;

· Glass ceiling theory;

· Compensating differences theory;

· Efficiency wage theory.

In a more extended sense opportunity cost is the evaluation placed on the most highly valued of the rejected alternatives or opportunity. From the perspective of pay differentiation opportunity cost theory is a subsequent elaboration of the David Ricardo's “Concept of Economic Rent” for such factor of production as labour. According to Ricardo (1817), the excess of total payments given to any factor of production should be higher than so called “transfer earnings”. Simply stated, the opportunity cost of doing one work is the value of any benefit foregone, or given up, by not doing another work (Ricardo, 1817). In compliance with neo-classical economic theory, pay differentials are associated with the presence of so-called non-competing groups of workers engaged in various activities that require different skills and competencies, and, therefore, raise different income (see Figure 4). As it is illustrated in Figure 4, employees with different levels of skills, education and competencies have different extents of labour supply's and demand's elasticity and, in turn have different wage rates.

Figure 4. Non-competing groups of workers on the labour market

Resource: Differentiation of wages, EconomicPortal.ru

The concept of human capital assumes that "the most valuable of all capital is that invested in human beings" (Marshall, 1980). According to the human capital theory, the reason for the existence of pay differences is the accumulated work experience. In the opinion of Becker (1994), it has an important effect on the relation between earnings and age (see Figure 5). Earnings of trained persons can lower during the training period and higher at later ages because the return is collected then. The combined effect of paying for and collecting the return from training in this way would be to make the age-earnings curve of trained persons (TT in Figure 5) steeper than that of untrained persons, the difference being greater the greater the cost of and return from the investment (Becker, 1994. p 37).

Figure 5. Relation of Earnings to Age

Resource: Becker, 1964

The relationship between wage and work experience can be also differentiated by gender as a whole, and among women in particular (Karabchuk et al., 2013). According to the human capital theory, there is a wage penalty (differences in the accumulated work experience) between mothers and non-mothers (Napari, 2007). The important factor of pay differentiation associated with the loss of human capital during the child-related career break (see Figure 6).

Figure 6. Wage dynamic for women with children and without children

Resource: Karabchuk et al., 2013 [Translated from Russian]

According to Alkadry et al. (2006), gender pay disparities also can be explained by the Glass ceiling theory. By definition of US Department of Labor (1991), Glass ceiling means “those artificial barriers based on attitudinal or organizational bias that prevent qualified individuals from advancing upward in their organizations into management-level positions” (Grout et al., 2011). In line with this theory, gender pay differences have traditionally been attributed to the concentration of women in lower-paid positions for cultural (Naff, 1994; Newman, 1994; Heilman et al., 2004), organizational (Guy, 1993; Newman, 1993; Budig, 2002) and human capital reasons (Lewis et al., 1989).

Another explanation of pay differentiation can be derived from the theory of compensating differences (or equalizing differences), which enables to take into account both pecuniary and non-pecuniary aspects of jobs. According to this theory, in the competitive labour market all jobs are equally attractive to the worker. In fact, ceteris paribus, people prefer clean and safe occupations. The power and prestige also play a great role. Irving Fisher (1927) defined such preferable factors as “psychical income”.

More often the theory of compensating differences is used in labour economics to analyse the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. For instance, the relationship between wage rate and the risk of injury is illustrated in Figure 7, where A1, A2, B1, B2 represent worker indifference curves, X' and Y' represent zero profit iso-profit curves for organisations X and Y. In this case, compensating differential is defined as “the additional amount of money (and/or non-pecuniary benefits) that a given worker must be offered in order to motivate him/her to accept a given undesirable job, relative to other jobs that worker could perform” (Rosen, 1986).



Figure 7. Negotiations over wages and risk

Resource: Ehrenberg et al., 2012

In recent Russian studies the theory of compensating differences is used to explain the pay differences of public sector employee (Lykianova, 2007), gender wage gap, interregional pay differentiation (Oschepkov, 2007a; 2007b) and discrimination of pay for women with kids (Karabchuk et al., 2013).

The last theoretical model of pay differentiation can be explained by the efficiency wage theory which asserts that “the productivity of workers in organisations is positively correlated with the wages they receive” (Katz, 1986). The explanations of this theory can be illustrated by sub-models to the efficiency wage theory, represented in Table 4.

Table 4.

Sub-models to the efficiency wage theory

Sub-model	Characteristics
Shirking Model	If workers receive a higher wage, the cost of losing their job becomes higher, and this acts as an incentive for workers not to shirk and risk being fired
Gift-Exchange Model	A higher wage is seen by workers as a gift from the firm, and workers will want to return this gift in the form of higher effort
Fair Wage-effort Model	If workers were paid a wage below what they perceived as fair, they would not apply as much effort as when they got a "fair" wage
Adverse Selection Model	A wage which is above the labour-market equilibrium wage will draw more workers to the gates of the firm, thus allowing the firm to choose better workers from a bigger pool
Turnover Model	If workers are paid a higher wage than they would get at other firms, they are less inclined to quit their jobs, thus decreasing the firm's turnover. The firm thus saves itself the costs of hiring and training new workers

Resource: Blackwell, Year

Building on this understanding, we may conclude that analyzed theoretical models on differences in pay of people with similar skills are unable to clarify all reasons of pay differences. Discrimination by gender or national origin may also lead to differences in wages. Finally, the conditions of imperfect competition in the labour market are another source of wage differentials, especially for countries with transition economies (Oschepkov, 2007b). However, the main theories of pay differentiation are briefly explained. In spite of assumptions, limitations and criticism, all above mentioned theoretical models are partly explained the phenomenon of pay gaps and wage differences. Furthermore, according to some researchers (Lykianova, 2007; Napari, 2007; Oschepkov, 2007a; 2007b; Karabchuk et al., 2013), these theories can be applied in particular to the analysis of civil servants' pay differentiation. On the basis of analysed theories the following factors of civil servants' pay differentiation were identified (see Table 5):

Table 5.

Factors of civil servants pay differentiation

Theories	Factors
Opportunity cost theory	Occupation, sector of economy, industry, skills, education, competencies
Human capital theory Glass ceiling theory	Age, gender, ethnicity, education, experience
Compensating differences theory	Risk, image, prestige, stability, working conditions, region, territory
Efficiency wage theory	Psychological factors, health, attitudes, perceptions, expectations, morale, interrelationships, values, ethics

In light of the fact that pay differentiation is usually defined as “different levels of civil servants earnings according to some factors”, the following types of civil servants' pay differentiation were identified:

· Gender pay differentiation - different levels of civil servants earnings according to gender;

· Ethnical pay differentiation - different levels of civil servants earnings according to nationality, ethnicity, race;

· Regional pay differentiation - different levels of civil servants earnings according to regional peculiarities (climate, urban conditions, environmental quality, etc.);

· Sectorial (occupational) pay differentiation - different levels of civil servants earnings according to occupational peculiarities (in this case, it is differentiation between public and private sector);

· Psychological pay differentiation - different levels of civil servants earnings according to the extent of employee satisfaction of pay level;

· Vertical (hierarchical) pay differentiation - different levels of civil servants earnings according to the level of job position;

· Horizontal pay differentiation - different levels of civil servants earnings according to organization (in this case, it is differentiation between the same job positions in different organisations).

Summarizing the discussion presented above, we may conclude that Opportunity cost theory, Human capital theory, Glass ceiling theory, Compensating differences theory and Efficiency wage theory can partly explain the phenomenon of civil servants' pay differentiation. As we have already indicated earlier, types of civil servants' pay differentiation can be identified in accordance with such influenced factors as gender, ethnicity, regional peculiarities, occupation, sector (public or private), employee satisfaction of pay level, job position and the particular organisation itself as a whole. Some of the ways which can be involved in optimization different types of civil servants' pay differentiation will be considered in the following section.

Section 3. Possible ways of optimization civil servants' pay differentiation

This section presents analysis of optimisation ways of civil servants' pay differentiation which used in different countries for different types of civil servants' pay differentiation. In this context it is worth to note, that the notion of “optimisation” is closely related with justification for certain type of pay differentiation, rather than increase or decrease of its level. However, in response to the importance of pay differentiation magnitude, the author has put forward the following assumption:

The level of pay differentiation can be optimal if the way of optimisation enables to explain it from the efficiency perspective.

In order to determine the existed ways of optimisation civil servants' pay differentiation, the most cited articles from academic citation indexing Web of Knowledge were analysed (see Appendix 2). As it mentioned in Literature review, public sector pay differentiation has been given relatively little attention in the large empirical literature on wage differentials. Figure 8 illustrates the number of published items on public sector pay differentiations by countries during the last twenty years (there were only 55 articles on this topic). It is readily seen that the most of published items were written in USA, the second place took Australia, and the third - Canada. Therefore, a number of supplementary materials outlined in literature review were considered to analyse types and ways of optimisation civil servants' pay differentiation in different countries.

In previous section it was already pointed out that the most commonly applied theoretical framework in the literature estimating the pay differentiation is based on the following theories:

· Opportunity cost theory;

· Human capital theory;

· Glass ceiling theory;

· Compensating differences theory;

· Efficiency wage theory.

Figure 8. The number of published items on public sector pay differentiation by countries, 1994-2013

Resource: created on the basis of Web of Knowledge platform

In relation to these theories, it is worth to consider the evidence of pay disparities and possible ways of optimization of civil servants' pay differentiation which used in some countries mentioned above.

Special points for attention in this matter are Gender and Racial (Ethnic) pay differentiation which can be explained by the Human capital theory and Glass ceiling theory (Styken et al., 2003; Alkadry et al., 2006; Oshchepkov, 2007b). Despite the provisions in legislation to provide for pay equality, the gender pay gap as well as racial pay gap is persistently present in different countries (Neathey et al., 2005; Prechal et al., 2006; 2007). For instance, according to Bozio et al. (2011), there is the evidence on different gender pay gaps in public and private sectors in UK (see Figure 9). Moreover, Semyonov et al. (2009) argue, that the impact of race on earnings differs across the USA sectors (see Figure 10).