Feature / Finance explained

Pay multiples

Accountants believe that further clarification around new director pay disclosure requirements is needed to ensure the data collected is consistent and comparable.

After the media had whipped itself into believing that no public sector chief executives should earn more than the prime minister, last year’s Hutton review of fair pay in the public sector came up with much more measured proposals around pay multiples. It called for public bodies to be required to publish the ratio of their ‘chief executive’s (or equivalent)’ earnings to the median earnings of the organisation’s workforce.

This has subsequently been translated into practice by an amendment to the Treasury’s Financial reporting manual and corresponding additions to the NHS manual for accounts and foundation trusts’ Annual reporting manual.

Change of terminology

The only noticeable difference between this amendment and the original Hutton proposal is that the various manuals refer to the ‘highest paid director, whether or not this is the accounting officer or chief executive’, rather than specifically to the chief executive.

Implementation guidance from the Treasury makes it clear it chose the term highest paid ‘director’ over ‘employee’ to allow for more consistent comparisons and because of the link between executive remuneration and the strategy and performance disclosed in the annual report. And it moved away from ‘chief executive’ because in many civil service organisations, the accounting officer – be it the permanent secretary or chief executive – is not the highest paid employee.

In many NHS bodies, the medical director will be the highest earner, not the chief executive. The Treasury guidance seems on the face of it to say that, where this is the case, it should be the medical director’s earnings that are used within the ratio.

However, one audit firm contacted by Healthcare Finance suggested that medical directors should not be considered – given that only a small part of their earnings will be related to their director responsibilities. Monitor said trusts should raise any questions with their auditors, which could then refer to the Treasury if necessary.

Calculation advice

Finance managers said that guidance was also needed on how exactly to calculate the median – for example, part-time staff salaries should be annualised. But one trust manager said that results could be distorted by different treatments within this calculation of additional sessions by consultants or other staff overtime.

NHS trusts and foundation trusts were also uncertain as to what might constitute an expected range within which the multiple should fall. They pointed out that local circumstances could play a huge part in determining the median salary. For example, in a trust with a major private finance scheme, the majority of the ancillary staff may be employed by the private sector, potentially raising the median salary of remaining NHS staff and reducing the multiple.

There could be significant differences in the reported multiples. For example, a trust retaining most services in-house and making greater use of part-time staff would expect to see a bigger multiple. Organisations, with one eye on the need to explain any future changes in the multiple between years, say it is important to ensure the calculations are consistent across the NHS and to encourage understanding of differences in local context.