Executive pay: don't believe the headlines
Matthew Sinclair 10:36am
Open yesterday's or this morning's papers, and you'll find plenty of reports about the
snouts of FTSE100 chief execs being in the trough again, while the rest of us suffer. Their pay is up 49 per cent, we read. Most people’s first and only response to these accounts of the
Incomes Data Services' (IDS) latest findings will be anger — and understandably so. But much of this anger and reportage is based on a mis-reading of the actual report.
The BBC's influence is huge. Its original report compared the rise in base salaries (which wasn’t 49 per cent, but a much less impressive 3.2 per cent) with a median rise for private sector workers of 2.6 per cent, but nowhere in the IDS press release does it say whether the rise in remuneration or salary among the FTSE100 directors is a median or a mean. That is pretty important. With a sample of directors at just a hundred mainly-globalised firms — hardly a proxy for employers in general — it is very possible for a small number of very large pay rises to bias the overall result.
For example, the BBC also reports that the highest paid chief executive was Mick Davis at Xstrata, who enjoyed a substantial £18.4 million. But his company’s profits grew by a massive 332 per cent in the calendar year. That suggests there might be special circumstances there that could explain a significant change in his remuneration and skew the overall findings.
Ryan Bourne, of the Centre for Policy Studies, contacted IDS and discovered that the median rise in total earnings is actually 16 per cent, much less than the rise reported in all the headlines. You'll be hard pushed to find this figure in any of the newspapers (even the FT). Comparing the 49 per cent mean rise in total earnings with the 2.6 per cent rise in median salaries as the Telegraph did is pretty much meaningless. The 16 per cent to 2.6 per cent comparison is still striking enough to make a point, and has the advantage of accuracy.
The results have been presented as the consequence of drastic rises in bonuses. But look at the figures in the press release. Apparently, FTSE100 directors saw their average bonus payments increase by 23 per cent and their base salary grow by 3.2 per cent. But somehow that adds up to a 49 per cent increase in total remuneration. That suggests that the bias from a small number of very large settlements isn’t the only issue here. Changes in the value of benefits accumulated over years, thanks to rises in share prices for example, or passing the threshold of a Long-Term Incentive Plan, could be being counted entirely as income this year and be responsible for a lot of the increase in remuneration. It is hard to tell, and that’s the real problem.
There is a reasonable and important debate to be had about whether we need more shareholder activism to control executive remuneration and ensure it does not become excessive or reward failure. And, much more importantly, about whether measures that are squeezing middle-income families need to be scaled back.
But just because FTSE100 directors are doing better than the rest of us, it
doesn’t mean that there's no problem with wildly overstating how much better they are doing. While the protestors in the City seem to be mostly harmless hippies, the ‘us versus
them’ rhetoric of the 99 per cent versus the 1 per cent has the potential to become very ugly. The picture to the right, taken by an American blogger at Occupy Oakland, is one example of how. All across Europe people are very angry.
Stoking that anger with an exaggerated statement about the fortunes of FTSE100 directors will make it that bit harder for us to keep things in perspective.
After all, these directors are some of the high earners whom the left believe can finance our bloated government. We need them to be leading successful international companies, earning their spectacular incomes and paying their taxes here. That, of course, doesn’t mean they should be above criticism — as well off public figures they can take it — but they do at least deserve some honesty.
Matthew Sinclair is director of the Taxpayers' Alliance.
Previous
David Cockerham
October 29th, 2011 11:27am Report this commentI guessed instinctively that something like this was the case when I first saw the reports. What interests me is the fact that the business people the BBC wheels out to defend capitalism nearly always fail miserably to set the record straight clearly and convincingly in the way that this post does, usually coming across as arrogant two-faced spivs - see last night's Newsnight for example. Is this because our business establishment is comprised of arrogant two-faced spivs; or is it because it is too third-rate to understand or be able to present its own case; or is it because its best people just can't be bothered wasting time on the BBC when they could be making money; or is it because the BBC just happens by chance always to ask the third-raters to go on air; or is it because the BBC carefully selects the ones it knows it can use to reinforce its own spin on the story?
Dennis Churchill
October 29th, 2011 11:28am Report this comment“The BBC's influence is huge.”---yes, which accounts for a lot of our problems in this country.
and I'll go to bed at noon
October 29th, 2011 11:35am Report this commentYet again, the idea that the "Taxpayers' Alliance" speaks for the majority of taxpayers is exposed as a lie.
john gerard
October 29th, 2011 11:58am Report this commentWho cares what executives of FTSE100 companies get paid. If you're not a shareholder, it's none of your damn business. If the shareholders want to pay what many consider to be grotesque sums of money at their expense, that's up to them.
This is a total non-story.
DavidDP
October 29th, 2011 12:40pm Report this comment"directors saw their average bonus payments increase by 23 per cent "
And, pray tell, what was the extraordinary performance that justified an increase in bonus payments?
fjr otto
October 29th, 2011 12:55pm Report this commentThe 'whom' in your second paragraph is wrong. Why does illiteracy no longer surprise (but still vex!) me?
fjr otto
October 29th, 2011 12:56pm Report this comment... not 'second paragraph' but last: apologies.
Simon Stephenson.
October 29th, 2011 12:59pm Report this commentMr Sinclair
A sentence containing the words pot, kettle and black springs to mind.
Maybe you could take this sentence from your post:-
"The 16 per cent to 2.6 per cent comparison is still striking enough to make a point, and has the advantage of accuracy."
and explain to us why we should remain unconcerned about the possibility that executive pay levels are more a function of power than they are of competence, ability or achievement?
Also, you point to the massive surge in Xstrata's profits as being a possible cause of a skewing of the overall findings. Maybe you could illustrate your point by looking at those companies, like the banks for example, where there has been a massive fall-off in profit levels, and show us how the remuneration of top executives has fallen off in consequence - being careful, of course, to consider the norm, and not just the odd specific example which could be unrepresentative.
Tony Brownblair
October 29th, 2011 1:19pm Report this comment“The BBC's influence is huge.... I truly believe the most honorable thing a person can do at this moment in time is to just stop paying the license
toni
October 29th, 2011 1:53pm Report this commentMartin Sorrell was blustering all over the media yesterday doing your job for you, including appearing on the BBC.
This morning Tory MP Matthew Hancock (previously economist at the Bank of England, and advisor to the chancellor) has an article on ConHome titled “For markets to work properly we need a change of culture at the top of big companies”
This lunchtime Jeremy Browne, David Davis and Matthew Parris, all disagree with Matthew Sinclair's (Tax Payers Alliance) assertion and have talked about a potential new companies act.
Still, to be sure you're talking to the converted here.
Trapped
October 29th, 2011 1:54pm Report this commentYou assume of course that bank executive pay -has- slowed down at all. As far as I was aware it's been a pretty bumper crop of bonuses the last couple of years.
Rh-
October 29th, 2011 3:12pm Report this commentthe bbc doesnt even bother to pretend impartiality any more. It broadcasts the same daily "leftie outrage" that the grauniad prints.
daniel maris
October 29th, 2011 4:11pm Report this commentWell this just confirms what I always thought: that the so called Taxpayers Alliance is actually a collection of apologists for uncontrolled capitalism and not concerned for value for money for taxpayers.
The bonus payments are HUGE - nearly a quarter of salary. Does anyone seriously think that a CEO is going to work 10% harder if their bonus is 25% rather than 15%? And anyway, does working hard translate into making good decisions - given the performance of UK CEOs, it would seem not.
Another point you will find that alot of these bonus payments get incorporated in part into people's remuneration and that may explain why total remuneration has gone up 49% (as a large part of last year's bonuses will have been incorporated permanently into personal pay, whatever the meaningless "basic" is). It's a CON.
Remember - in many cases it's YOU who are paying these bonuses...as a taxpayer since many of these companies are supplying the public sector.
It's time to bring in worker representatives on boards as in Europe, whose companies outshine ours and to set some banded limits in terms of overall remuneration for CEOs of large public companies.
Occasional Ostrich
October 29th, 2011 4:47pm Report this commentWhaddya mean, "even the FT"? Isn't the FT one of the Speccie's favourite bêtes noir?
Forlornehope
October 29th, 2011 5:54pm Report this commentIn response to Daniel Maris, I worked for a company that was once a typical sleepy UK "champion". The possibility of making serious money (from making things BTW) did a lot to change the culture of that company which is now the dominant player in several world markets. The chance to make two or three million and give your kids a much easier start in life is a great motivator and this applied quite a way down the management structure, not just at the very top.
Baron
October 29th, 2011 6:53pm Report this commentThe two communist party card carrying members amongst us concern themselves with something that ain’t their business, both the directors' remuneration, and staff wages, salaries are for the companies to decide, as john gerard points out the owners set the rewards for the top, the directors what the employees are to get, if the latter are unhappy they are free to leave, Baron could never understand why strikers would hold companies to ransom over wages, the simplest way to show that one’s labour’s worth more than a company is prepared to pay for it is to leave, get a better paid job, is anything wrong with it DavidDP, the sleepy one?
YouCannotBeSerious!
October 29th, 2011 8:13pm Report this commentAn article to keep your paymasters happy eh Matt?
TrevorsDen
October 29th, 2011 8:32pm Report this commentThere is sadly no surprise in this.
We can always assume that whenever the media get hold of statistics then the result is a load of bollox.
A bastard mixture of ignorance bred out of political prejudice.
John McEvoy
October 29th, 2011 8:32pm Report this commentWho cares what mangers of private companies earn? They have to sell products to stay in business. What I object is fat-cat public employees who do SFA for the money.
daniel maris
October 29th, 2011 9:50pm Report this commentForlornehope,
Well we can't investigate the facts on the basis of an unidentified company. That's just an unsupported anecdote. How many people did the company employ before the
fairy dust was sprinkled on top management and how many do they now employ?
What I would say is that we are now way beyond a little extra financial incentive. We are talking about the difference between £5M and £10M PER ANNUM in bonuses.
Besides, it's clear that if you allow mega bonuses further down the management line, a lot of people just take the early retirement option.
daniel maris
October 29th, 2011 10:03pm Report this commentBaron -
Well no doubt you are very happy about the coming Chinese hegemony - they shoot trade unionists there don't they?
Incidentally you are completely deluded if you think the owners set executive salaries. That's what's wrong with the system. It's an executive merry go round that's setting the salaries.
2trueblue
October 30th, 2011 12:36am Report this commentI am much more interested in what our public sector employees are paid and where taxed money goes.
Ruby Duck
October 30th, 2011 1:18am Report this commentAgree with the article. The alleged 49% sounded like bollox. Let's have a proper analysis.
Agree with john gerard, John McEvoy etc. They're not on the public payroll and it's nobody's business but the shareholders.
Also agree that, as people, they are despicable. The main shareholders are themselves huge companies, and there's a blackguard's agreement to up remuneration at the top so that they all benefit.
The chances are they get their come-uppance in a quiet way. No-one stops to let a flash motor out at a junction. Every tradesman adds 50-100%. Every waiter in every restaurant spits in their food ...
fergus pickering
October 30th, 2011 7:42am Report this commentDavid Davis, no communist he, made the point that the shareholders are all big companies whose representatives are the same people who are getting big salary rises - in other words that the shareholders' meeting is a rich men's club.
Having said that I do agree that if the Beeb quotes a figure of 49% which is wrong, and the correct figure is 16.5 % we should be told. The Beeb's reporters are either stupid or lying or possibly both.
Simon Stephenson.
October 30th, 2011 9:28am Report this commentBaron : 6.53pm
"as john gerard points out the owners set the rewards for the top, the directors what the employees are to get"
Is this how it works in practice, Baron? Are the directors, the owners' agents, powerless to affect their remuneration levels other than through demonstration of their talent and abilities?
Or is the reality that the owners are one step away from this process, because overwhelmingly they are represented by another group of agents - the fund managers? Isn't the whole executive remuneration process determined largely by whose turn it is to scratch whose back in the cozy little arrangements that are the self-serving strategy by which agents at the top level screw their principals?
ROJ
October 31st, 2011 11:07am Report this commentAnd another thing about the data (coming rather late to this discussion - been away)The FTSE 100 is not a fixed list of 100 companies. It is revised each quarter. Companies that are failing - as measured by market capitalisation - are dropped out, and companies whose market caps are growing replace them. Thus at any given time the FTSE100 will include a number of recently successful companies, and this will tend to bias the remuneration statistics, compared with business as a whole.
Paul Danon
October 31st, 2011 11:27am Report this commentWealth isn't the problem. Indeed, the privately rich help matters by paying taxes and giving to charity. The problem is tax (paying for state-employed fatcats) and poverty. At least some poverty is caused by state-intervention in the markets for labour and housing.
tory boys never grow up
October 31st, 2011 12:38pm Report this commentWhichever way you cut I'm afraid the increases are not justifiable. They are not justified in relation to what the rest of the population receives - but they are not even justifiable in terms of right wing economic rhetoric. Where is the increase in shareholder value to justify these payments, why is it that although the salaries are justified on the basis that the recipients are the risk takers - those concerned don't seem to experience a reduction in their payments.
Why for example are Barclay's directors pay levels are now above pre crisis levels - but the share price and company earnings are not??
I'd also like to know why as a shareholder in these companies through my pension scheme I'm not able to express my views on the matter?
DavidDP
October 31st, 2011 4:47pm Report this comment"both the directors' remuneration, and staff wages, salaries are for the companies to decide"
I'd have thought it was for the market to decide, actually. Although you are right, companies appear increasingly able to decide excutive remuneration without reference to anything other than what they wish to pay themselves.
Were the market functioning, then it is self-evident that pay would not be going up at a time when companies are not performing well.
The TPA's cry of "Bonuses are only increasing by 23%" is in rather poor taste when those whose salaries are set not by remuneration committees populated by a small common set of non-execs who know how to look after their friends even during a downturn but rather actually by the market in reflection of the poor state of the economy are seeing their salaries decrease in order to keep their jobs, never mind bonus increases or even the retention of bonuses.
fifer
November 1st, 2011 10:46am Report this commentJohn Gerard writes "Who cares what executives of FTSE100 companies get paid. If you're not a shareholder, it's none of your damn business."
Errr, I couldn't have agreed more in the days when, as a taxpayer, I wasn't expected to contribute to tens of billions of pounds in bailouts for incompetently run firms.
Provided they stand on their own two feet, I don't give a toss. But as we're clearly expected not only to bail out banks but also construction companies, defence conglomerates and all the other usual suspects, I'll confess to being rankled.
Mr Oulton
November 1st, 2011 1:46pm Report this commentI used to support the good work of the Taxpayer's Alliance. Every time they crop up here now, they are defending something completely unrelated to what I thought they stood for. The shame. Who represents me now as a Taxpayer?
The apologists also apparently argue the excessive pay Chief Executives now receive - which ever median, mean or mode you use - should concern only their shareholders. It is of no interest - or the business of anyone else.
I can assure you it is not. Their pay widens income inequality. This has massive implications for society as a whole. Countless studies show inequality has having a detrimental effect on population health, social cohesion and also the potential overall sum of personal utility. It's most definitely my business and the rest of the country's too.
Back to top