“Over the last 12 years, chief executive salaries in Britain's top companies have quadrupled while share prices have remained flat”

Ed Miliband, Speech to the Annual Trade Union Congress, 13 September 2011.

Given the effects of the recession and cuts on the living standards of many of the general public, as well as general rhetoric from the government about us “all being in this together” the issue of CEO pay is one that can raise high passions.

But when criticising the growth in pay levels at the top this week, did the Labour leader get his facts straight?

Analysis

The opposition leader seems to have got the above result from the Manifest and MM&K Total Remuneration Survey (short summaries of which are available here and here). The summary explains that “over a twelve-year horizon [the report] finds that despite flat share prices CEO remuneration has quadrupled”.

There are, however, a couple of salient differences between the two quotes. The first of these is that while Mr Miliband refers to salary, this summary from Manifest uses the more general term, “remuneration”. Still, these terms are fairly synonymous, aren't they? The most significant portion of “remuneration” is annual salary. Right?

Not exactly.

A look at the actual Manifest and MM&K Total Remuneration Survey, which Manifest made available to us, has allowed Full Fact to examine the practical differences between these two terms in greater detail.

From 1998-2009 the survey does claim that that total remuneration of FTSE 100 CEOs increased by a factor of 3.89, roughly the quadrupling to which Ed Miliband refers. Mr Miliband does, however, make the claim that this quadrupling occurred “over the last 12 years”. The equivalent figure, however, for the period 1999-2010 is an increase by a factor of 3.43, slightly short of the quadrupling that he claims. This is all made clear in the below graph.

Source: Manifest and MM&K Total Remuneration Survey, p.25

As Ed Miliband claimed, there has not been a significant rise in FTSE 100 stock prices over the same time period.

What has been happening to the average FTSE CEO salary in the meantime? In 1999 this average salary was £444 000. By 2010 this had increased to £825 000. This is an increase by a factor of 1.86. This is a significant increase but is well short of the quadrupling that Ed Miliband posited, underlining the problem of substiting “salary” for “total remuneration” in the speech.

The full significance of this is made apparent by looking at the proportion of average CEO total remuneration that is made up by average salary. In 1998 this figure was 42.4 per cent, by 2010 this figure had shrunk to just 19.4 per cent.

These results all combine to mean that salary is not the most illustrative figure to use in isolation when referring to the pay of FTSE 100 CEOs.

If not salary then, what factors in particular have combined to produce this incredible rise in total CEO remuneration? 

Looking at the earlier graph, the section labelled “LTIP EV” is the one that has seen the most dramatic increase. It is now easily the largest component of the total remuneration figure, having been the second smallest in 1998.

LTIP stands for Long Term Incentive Plan. The amount that the CEO eventually earns from being awarded these is in some way linked by the company to the future success of the company (thus supposedly producing the “incentive” effect for which they are named).

LTIPs have this in common with the award of share options, and indeed part of the the increase in the amount awarded to CEOs through LTIPs seems to be that “there has been a swing away from share options to LTIPs”, with LTIPs to some extent replacing the award of share options.

To negate for this effect we can instead concentrate on the increase in the subtotal of share options and LTIPs over these last 13 years. Another look at the earlier graph show that this subtotal itself has grown dramatically, both in absolute terms and as a proportion of total remuneration.

But what about bonuses paid to these executives? Looking at bonuses and deferred bonuses as they are categorised in the report, these sections account for 31.7 per cent of average FTSE 100 CEO total remuneration , up from 22.6 per cent in 1998. 

It is worth pointing out, however, that this is outstripped by the combined value of LTIP and share options, an area that has had relatively little coverage.

Putting the claim back in a bit more context, what happened to the remuneration of FTSE 100 executives relative to the rest of the economy. The graph below sets it out:

Source: Manifest and MM&K Total Remuneration Survey, p.26

Conclusion

Ed Miliband's claims are apparently a misquote or misunderstanding of the Manifest and MM&K Total Remuneration Survey. The four-fold increase that he refers to is total remuneration and not salary. 

Ultimately the broader point – that Chief Executive pay has gone up dramatically in the last decade – is not undermined by this discrepancy.