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Executive pay: beware the headlines

    The newspapers and Twitter are awash with outcries over the huge increase in executive pay. An excellent report, undertaken by Incomes Data Services, has reviewed the remuneration of FTSE 100 Directors and CEOs. Their headline figure is that total earnings for FTSE 100 directors have increased, on average, by 49% over the past year, with an average level now of £2,697,664 per annum. Within this, FTSE 100 directors saw their bonus payments increase by 23% to £906,044 in 2011.

    But one must be careful when examining these figures. Total earnings for an executive of a FTSE 100 company are complex things to calculate. Not only do they include fixed pay, salary and benefits, but also bonuses across the year (cash and deferred) plus the ‘crystallised’ money value of any long-term incentive plan. And because we are at the high end of the income spectrum, there are inevitability huge deviations in the size of each of these earnings components across directors.

    I spoke to Steve Tatton, the editor of the report, who gave me a brief insight into the scale of the different components. He suggested that in many cases the basic salary might only make up a quarter of total earnings, with bonuses often 150% of the salary and huge share based award schemes (the highest of which was a cool £14.5 million).

    These are obviously huge amounts of money. But it’s important to note that examining the high end of the income distribution brings with it huge disparities between directors. In fact, the reporting of the average figure here is likely to be strongly influenced by a small number of large increases, and so may not be the most appropriate measurement. In most examinations of pay, the median value is used, which avoids the disproportionate influence of extreme high and low data points.

    To be fair to the IDS report, they do also report these figures, but the media choose not to. The median increase of total earnings was much smaller than the average figure, with increases by 16% over the past year.

    This is evidently much smaller, and the media should be careful not to compare means and medians. It’s like comparing apples with oranges. This Telegraph article, for example, uses the headline average figures of 49% for FTSE 100 directors and compares them with median increases in the private sector generally of 2.6% - implying a monumental deviation in earning growth.

    Comparing like with like would mean 16% vs. 2.6% - still a substantial differential with faster growth at the executive level, but far less dramatic than those glancing at today’s papers would suspect.

    Update: it appears there is something interesting going on here, even looking within the average increases. The report states that average bonus payments for FTSE 100 directors have increased by 23% whilst base salaries have increased by just 3.2%. To get to the overall 49% increase in total earnings, the other components such as benefits and share based award schemes would have had to have increased substantially.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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