It is an understatement to argue the British public sector is under siege. Criticism rains in from all sides: it is inefficient; it is a host to fat cats; it is an obstruction to change; it resists its own reform. Even a majority of its own employees report they have little faith in their bosses and complain that poor performance isn’t dealt with effectively. If you believe in what the public sector does, and that it makes a vital contribution to the health of our economy and society – and I do – then these are dark days.

The trouble is that too much of the public sector is vulnerable to the criticisms that are made. Pay at the top is too opaque in how it is determined. Too much of the public sector is too impervious to the disciplines and incentives that drive performance in the private sector. It is too easy for impatient politicians (New Labour as much as the coalition) to play to the gallery, arguing that the public sector is a millstone; it should be privatised and contracted out.

There needs to be a new settlement between public sector leaders and the taxpayer; a recognition that good work deserves good rewards, but similarly bad work deserves penalising. To do all this there has to be a radically new framework in which senior pay is explained and justified. The public sector must develop a charter for transparency and embrace a focus on performance, challenging the private sector to follow its lead. Indeed, with so many British companies dependent on the taxpayer for so much of their business – especially the fast-growing public service companies, such as Serco – the government could insist it wants them to follow the same principles.

Although my starting point was to look at capping top executives’ pay at 20 times that of the lowest-paid employee, I came to the view that this simple ratio, which looked like it would introduce fairness, paradoxically would produce the opposite. Large, complex organisations might have lower pay at the bottom than simpler ones – so the bigger organisation’s top executive would earn less than his peer at a smaller one. Arbitrary caps make no sense.

But pay multiples remain a great way of tracking what goes on in organisations over time; they are a signal of pay developments that need explaining and justifying. I propose that every public body in Britain should annually publish the multiple of the pay of its chief executive to the most representative worker – the worker whose pay package is in the middle, or the median. The Senior Salaries Review Body should collate these reports into an annual fair pay report. Any citizen in the UK could then see what any senior public executive earns and how it is justified, and make comparisons.

It is clear in the reaction to my report that people will remain suspicious as to whether public bosses are really worth the money. If any concerns raised by taxpayers go unnoticed, I suggest a process of escalating intervention, with the final sanction of the Senior Salaries Review Body suggesting pay bands that would be imposed on the offending public body.

I propose a further innovation to eliminate the fat cat label: ‘earn-back’. Every public sector leadership team should place at least 10 per cent of their base pay at risk, to be earned back by meeting a balanced scorecard of measures. Only if objectives were met would executives receive their full basic pay, and only if they were clearly exceeded could any bonus be awarded. The targets should be set by an independent remuneration committee including a member of the workforce; employees know best what challenges the organisation faces.

While much of my report has been welcomed, this has been the part to which reaction is most guarded or even hostile. The objection is that performance is too difficult to measure in the public sector; but so it is in the private sector. To decide not to identify what good performance means is as big a statement as doing so.

There is also a misunderstanding of what I am proposing. Every CEO or leadership team should already have an annual appraisal. I want to democratise that discussion, make the basis for appraisal more explicit – involving a member of the workforce – and give the process some teeth by making part of pay conditional on meeting the objectives. I believe it would give the public sector and civil service an environment in which there were explicitly consequences for actions – and provide a narrative to hit back at public sector detractors.

In addition, I want to make the public sector an attractive place for the talented and ambitious to work, widening the pool, creating more competition and more movement. Everything – from graduate entry to recruitment jobs – should be organised around this aim. I don’t know how much of this report the coalition will accept – especially the similar measures aimed at private business – but I do know the public sector needs more transparency about how its top people are paid, and a better account of itself for its critics. This is my best stab at providing answers.

Written by Will Hutton