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The high level of earnings by senior people in private sector companies has hit the headlines once more with a series of outcries in response to news revealed in the Income Data Services report that FTSE 100 Directors experienced an increase of 49% in earnings over the last year.

While the increase in basic pay averaged only 3.2%, this figure was dwarfed by an average bonus payments increase of 23%, from £737,624 in 2010 to £906,044 in 2011 plus  the “crystallised? value of long term incentive plans (LTIP) and share options cashed-in during the year.

Overall IDS have revealed that -

• CEOs received an average increase of 43.5% (average earnings £3,855,172)
• Finance directors received an average increase of 34.1% (average earnings £2,001,515)
• All other directors received an average increase of 66.5% (average earnings £2,260,033)

In the press release from IDS themselves, the report’s editor, Steve Tatton reflected on the sensitivity of his findings, saying

Overall comment has been pretty negative however with very predictable condemnation from unions. Polly Toynbee has drawn attention to the diverging experience of those at the top and bottom of the earnings range, with the government considering reductions in employment rights and broader protections. Comment on these proposals has been quite dismissive. Attractor has asked the question if employees are Too Hard to Sack and would generally suggest that problems with terminating under-performing people are related to management culture and policy rather than employment law.

So what has happened in 2011?

David Cameron has reacted by saying people in public life and private enterprise should be able to justify the decisions they make about pay and has called for more information about pay decisions to be published, including the multiple in remuneration between the lowest and highest paid in the company. The government is currently consulting on the requirements for company reporting.Nick Clegg has described some pay awards as “incomprehensible”, suggesting they will be seen as a “slap in the face” for millions of people.

Attractor has covered issues of pay and rewards many times, broadly supporting the view that employers’ pay decisions reflect market forces. While this might explain high reward levels generally, attempts to explain why top bosses are doing so well at a time when most people are struggling have been quite poor. Basic pay increases of 3.2% are not so outlandishly high in the current climate – although still higher than many people will be getting.

Looking at the information on recent economic performance, there are strong clues suggesting what has probably happened. While in the 12 months to March 2011, the FTSE 100 gained around 4 percent, in an impressive run, the Footsie’s rally to a mid-February 2011 high of 6091, exhibited a 73% recovery from the low of 3512 in March 2009. It would be no surprise if directors were astute in cashing in the share options the have been rewarded with over recent years (in times when companies were encouraged to reward people for longer term success.   looking to maximise their earnings from the general increase in confidence that took place during the initial stages of recovery from the recession.

In that regard the figures don’t look incomprehensible … they seem simply to reflect well-informed decisions by directors working in highly competitive roles who are able to command very lucrative contracts. If not incomprehensible, the numbers show do highlight how far outside the reach and experience of most people this small group has become – though they are by no means alone in that respect.

If there is criticism of company reward structures, it might be legitimately said that directors too easily gain from general movements in stock values rather than from the results of their own performance. Remuneration policies would need to be more carefully crafted to ensure a company’s relative performance against broad market changes drove directors reward.