Whether it’s a case of “In war, truth is the first casualty” or “Lies, damned lies, and statistics”, sound arguments for reform can easily be undone by the careless use of dodgy data to fit a chosen position.

The debate around reform of executive remuneration is in grave danger if the UK government continues to rely on data which has been manipulated to fit a particular lobbying position. We’re talking here about the mythical 49% pay rise figure being quoted by politicians and lobbyists as a justification for radical reform of executive pay arrangements. Why mythical? Because the facts tell another story.

Let us be very clear, Manifest is no high pay apologist; there have been some truly egregious pay practices foisted on shareholders over the past 15 or so years and we have been on the receiving end of some bruising rebukes from companies unhappy that we’ve managed to lay bare for shareholders the potential generosity of their schemes. However, regulatory reform must be based on objective and accurate evidence if it is to a) be taken seriously and b) stand any chance of working.

The mythical figure comes from a study by Incomes Data Services. The press release announcing its publication states: “FTSE 100 directors have seen their total earnings increase by an average of 49% in the last financial year”.

What most observers are not aware of is that the headline 49% figure was the mean of the increases, i.e. they added up all the increases and divided by n. This is not a representative picture and as any academic would tell you, this is not good statistics practice. Here is a worked example using current data:

One of the biggest decreases in FTSE100 CEO pay was at Reckitt Benckiser where there was a big drop of £76m, yet as a percentage this is a change of -80%. Top of the FTSE100 CEO percentage increases is Cairn Energy increasing from £880k to £7.07m or +703.98%

 

Using the IDS/High Pay Commission methodology, the mean increase of these two examples is 311% which clearly doesn’t paint an accurate picture of what is going on.

As the Climategate Affair showed, it is essential to show your workings if you want to be taken seriously. So, in the interests of transparency, here are Manifest & MM&K’s workings.

Since 1996 Manifest has worked with independent remuneration consultants MM&K (formerly Peter Brown’s Top Pay Research Consultants) to produce a detailed and objective analysis of pay practices across UK quoted companies based on the disclosures in annual reports arising from the Greenbury Committee reforms. The September 2011 survey analysed the latest annual reports of 665 companies. We included most of the companies with financial years ending 31st March 2011 as well as those ending 31st December 2010, thus making the report data the most up to date available.

First some definitions to avoid confusion. We use as the primary basis of comparison Total Remuneration Awarded, which we define as the total of salary, cash bonuses, deferred bonuses, pensions, benefits-in-kind and the expected value of share options and other share plans awarded in the year. In some places, we use the term Total Remuneration Realised which excludes deferred bonuses awarded in the year and the expected value of share options and other share plan awards in the year, but includes the “amounts realised” from LTIPs and deferred share schemes that vest in the year, plus gains on options exercised in the year. These amounts realised are from awards made in earlier years.

Key Results

Yes, directors pay did increase in 2010/11 with those in the FT350 companies receiving larger increases than those in Small Cap and AIM companies:

 

Half of directors in the sample received salary increases. The median increase was the lowest in recent years.

(Please note that you cannot add medians – for example the FTSE 250 figures look odd, with median increases of 2% salary, 7% bonus, LTI payouts 0%, yet total remuneration increased 16%. We did check this slightly odd looking result and it is right.) The FTSE100 index went up 9% in 2010 : CEOs on average did better than shareholders, both in terms of expected value of awards and amounts realised. The 12 year trend data shows the FTSE100 index has not increased, during which time pay has quadrupled (see page 25 of the report).

More detailed figures are shown in the report. Readers should look very carefully at the quartile data. There are also considerable differences by sector and company size.

Discussion

The debate around high pay has unfortunately managed to conflate and confuse the problems of Investment Banking pay and PLC director pay.

The truth is that the awarded total remuneration increases in the past year are probably in line with UK general employee increases of two or three percent. In other words remuneration committees (which comprise past rather than current executives from other top companies) HAVE been getting the message and ARE showing restraint.

The median CEO salary increase was two percent (many got zero), and any increased bonus opportunity was generally offset by reductions in long-term share incentive grants, as companies (perhaps regrettably) showed a preference for deferred bonus plans as their main long-term incentive vehicle. So, no real ‘hike’ at all.

There is also the problem of “data laggyness”. The most common company year end in both studies was December 2010. The IDS total earnings figure includes bonuses actually earned in the year and long term share incentives vesting in the year.

First bonuses: FTSE 100 CEO bonus plans are not discretionary – they are paid on targets set at the beginning of the year (nearly two years ago for companies with a December year end). The Manifest figure shows a median 13% total bonus increase, mostly due to company profits increasing from the previous year (FTSE 100 earnings per share up 39% on average).

Next long-term share incentives: those vesting in 2010 were awarded at least as far back as 2007, and if boards were growing more generous with their awards it happened then – before Bear Sterns and before Lehman. But most of the year-on-year long-term incentive increase is due to improvements in share prices: the FTSE 100 index averaged 5674 in 2010, 17% up on the 2009 figure of 4679. Leverage that up with earnings per share growth performance vesting of share incentives and you can see the cause of the increases.

So, this is rather “old” data. Secondly, far from these increases bearing no relation to performance, they are just about all due to (shareholder-approved) performance plans paying out when performance improved, and not due to boards “increasing pay”. You might not like the chosen definition of performance. A lot of these incentive plans are far too short-term in their perspective. Some commentators may feel that profit increases have been achieved at the expense of other employees. But it is certainly “performance” that drove the increase.

It is hard to justify the increases in total executive remuneration we saw in the 10 years up to 2008, certainly company share or profit performance didn’t justify it. But, as selected shareholders have exercised their stewardship muscle and the debate about top pay has become more transparent, many (sadly, not all) UK boards have changed their behaviour over the past three years.

At a time when the UK social fabric is at risk, it is vital that we get a truthful picture about what is happening to the pay of our industrial leaders and about the interaction between asset owners and their investee companies.

Post-Script:

Our headline, “The Median Isn’t The Message” is fully attributable to the late Professor Stephen Jay Gould, Harvard evolutionary biologist and science historian who authored the 1985 essay The Median Isn’t the Message in which he talked about how the misunderstanding of statistics can lead people to false expectations and incorrect decisions.

Last Updated: 6 January 2012