FTSE directors’ pay rise figures called into doubt

A report suggesting that FTSE 100 executive directors saw their pay packets rise by more than 50% over the year to June 2010 has been described as a “significant misrepresentation of the facts“.

Last week, Incomes Data Services (IDS) said that FTSE 100 directors had seen their total earnings boosted by an average of 55%, taking home £4.9 million on average.

While basic salary increases across the board were subdued, growing at just 3.6%, pay packages were boosted by a resurgence in bonus payments, the value of share option gains and separate long-term incentive plans, the Directors’ Pay Report said.

The report received widespread press coverage, referring to “55% pay rises”, but Peter Boreham, head of UK executive reward at management consulting firm Hay Group, said that this was “a significant misrepresentation of the facts”.

“Pay has indeed gone up over the last 12 months, but a 55% increase considerably overstates the situation,” he said. “The number in the IDS survey is an average, skewed by a small number of large increases. The equivalent median – a far more representative number – is less than half of this, at 23%.”

The methodology used by IDS to value “pay” allows for share price movements, including paper gains on unexercised share options, Boreham added.

“As such, part of the reported ‘pay increase’ is merely the inevitable consequence of paying in shares – an approach endorsed by shareholders, governments, lobby groups and regulators around the world,” he said.

“No sensible observer would deny that there are legitimate shareholder and public concerns about executive pay. However, reporting an exaggerated and misleading increase does little to advance the debate.”

The Institute of Directors (IoD) also questioned the IDS research as it unveiled the findings of its annual pay survey today (November 1).

The analysis of the pay and bonuses of more than 1,500 directors, carried out for the IoD by Croner, shows that 46% have had either a pay freeze or pay reduction in cash terms in 2010. The average pay rise for the 54% who received one in 2010 was 2.5%, the IoD said.

Miles Templeman, director-general of the IoD, said: “This survey kills the idea that company directors are beginning to enjoy big pay rises at the very moment a pay freeze takes effect in the public sector. For the second consecutive year, most directors are seeing their basic pay and bonuses go down. Clearly the impact of the recession on director remuneration is still being felt.”

For more on this debate, see XpertHR’s Employment Intelligence blog post.

How to measure pay levels accurately

The average figure can be influenced by particularly high, or low, figures. Where executive pay is concerned, there may well be some figures that are way above the others, for example as a result of “golden goodbyes” or a spike in share prices (as IDS take into account the value of unexercised share options) and these will skew the average upwards.

In addition, the sample here is not huge, taking only executive directors in the FTSE 100 companies. This will exacerbate the problem of using the average.

The median, the midpoint value in the range, is unaffected by particularly high or low values, and therefore produces a figure that is more representative of the group as a whole.

So, if 85 of the directors earned £200,000, and 15 earned £2 million, the median value would be £200,000, which is representative of the group as a whole. But the average would be skewed upwards to £470,000, which is well above what most of the sample group earn.

The interquartile range can also be quoted to give a wider view of the values in the range – it runs from the lower quartile (the point at or below which a quarter of values fall) and the upper quartile (at or above which a quarter of values lie).

Source: Sheila Attwood, pay and benefits editor, XpertHR.

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