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Hot topic: Can pay be too high? Part two

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A recent report by Incomes Data Services suggested FTSE 100 directors’ pay is now on average 120 times that of employees, up from 47 times higher in 2000. Should something be done to manage the levels of executive pay? Here, Deborah Rees, director of Innecto Reward Consulting shares her view.

The report identified directors’ pay within the FTSE 100 has increased by 21% over the 12 months from May ‘13 to June ‘14.  And that the pay gap between the top jobs and the average employee is increasing.  Given this is against a backdrop of low employee pay increases, it provides a shocking headline.  But look beyond those headlines and it isn’t as black and white.

Much of the increase is due to vesting of long term incentive share plans (LTIPs). LTIPs pay out on a three-year cycle, so shares awarded this year will not vest until 2017.  We are seeing shares awarded in 2011 paying out now.  As the value of these shares has risen, it has created a high payout.  The increase in shareholder value has provided the increase in reward, rather than the company paying more in base and bonus.

Shareholders are demanding a stronger link between company performance and exec pay. We have to live with the results; if share price goes up, so does compensation.  If you remove the variable pay element, basic pay has only increased 2.5%

Aside from that, there are some legitimate reasons for the widening gap between top and bottom jobs.  Running a FTSE 100 company has changed significantly over the last fifteen years; it is a different beast.  A bit like the Premier League, only the top businesses remain in it. It is competitive and shareholders demand the best team managers.

Over the last few years, a shop assistant’s job in Sainsbury’s has remained largely the same. But if you run Sainsbury’s you not only have to lead a huge retail business, you have to understand a global market, run a bank, an insurance company, a big data company and an e-commerce business.  The business and the money involved have become far bigger and more complex.

Deborah Rees is director of Innecto Reward Consulting

Click here to read the first part of the Hot Topic by Luke Hildyard, deputy director of the High Pay Centre