Are chief executives overpaid? Barbara Millar investigates the controversy surrounding managers' pay

A hue and cry in the tabloid press greeted the revelation that chief executives had been awarded an average 5.2 per cent salary increase when the people they were employing had been offered significantly less. The figures were revealed in a survey of trust chief executives' pay published in April by Incomes Data Services.

Health secretary Frank Dobson reiterated his message - first delivered in a letter sent to trust chairs in January - that senior managers should not receive bigger pay rises than doctors, nurses and other staff as this was 'damaging to morale and motivation in the NHS and to public perception'.

Unison head of health Bob Abberley joined in the chorus, saying the IDS report reflected 'the glaring gap that persists between those at the top and staff on the wards'.

But John Northrop, director of Pay and Workforce Research, which also carries out surveys of NHS managers' pay, points out that the IDS report was referring to increases for chief executives in a different year. They were for 1996-97 rather than the 1998-99 financial year, in which the government decided to implement the pay review bodies' recommendations of 3.8 - 4.2 per cent in two stages.

'Articles which quote the level of pay increases over the previous 12 months can be very misleading, ' says Mr Northrop. 'To get a true picture of pay increases the analysis needs to be based on a matched sample which tracks the earnings of the same individual in the same post. Even then, it is important to be sure that the individual's responsibilities have remained broadly the same.'

Simply matching trusts between years does not give an accurate picture, he claims, because a merged trust may have had two chief executives in post during the financial period or a chief executive may have taken on significant additional responsibilities, making payment appear excessive. Besides, he adds, recent PWR research has revealed that in 43 per cent of trusts the medical director, not the chief executive, is the highest paid director.

Chief executives' pay is calculated by a remuneration committee made up of non-executive directors of trusts.

Guidance from the NHS Executive determines the committees' terms of reference (see box, above).

'The remuneration committee should be made up of people with no financial interest in the outcome of its deliberations, ' Mr Northrop explains. 'They have to collect independent information and advice about the market rate for chief executives.'

By far the most important influence on the earnings of chief executives is the size of the trust they manage.

According to PWR, most NHS chief executives earned between£60,000 and£76,000 in the 1996-97 financial year, with median earnings - the midpoint - at£67,000. Based on PWR's 1997-98 survey of senior managers' rewards, which showed that the most common cost-of-living increase awarded to senior managers was 2 per cent, the median earnings of a chief executive for the 1997-98 financial year was in the region of£68,300 a year.

The IDS survey reveals that median earnings in 1996-97 ranged from£55,000 in trusts with an income of less than£20m to£90,000 in trusts with incomes of more than£75m. But higher-paid chief executives in small trusts can earn the same or even more than their counterparts in much larger trusts.

PWR research shows that chief executives in 41 per cent of trusts outside Scotland received performance-related pay in addition to their basic pay in 1996-97 (no PRP information was published on Scottish trusts). Payments ranged from£1,000 to£15,000, but most payments were small and 59 per cent of chief executives received no payments at all. The median value of benefits - in most cases, the provision of a lease car - was£3,000, although larger trusts offered more generous packages.

PWR also finds considerable variation in the earnings of chief executives depending on the type of organisation they manage. Earnings are highest in acute trusts, slightly lower in community, mental health and learning disability trusts, and lowest in ambulance trusts, although the value of benefits tends to be higher in the latter.

John Langran, senior human resources adviser and lead officer on rewards with NHS Personnel, which also produces surveys on managers' pay, believes pay in the service is, on the whole, handled fairly. 'In the past, when trusts were first formed, there were a few silly decisions made which caused some public relations problems. But most trusts since then have been very modest in their rewards.

'The changes in pay have reflected real changes in managers' responsibilities. Managers' pay has been unfairly lambasted in the press.'

Last year, most trusts offered chief executives similar pay increases to those given to other staff, says Mr Langran. 'Bonus schemes and other arrangements have been reducing progressively as things have got tighter.

With an average chief executive salary of around£70,000, very few are earning more than a consultant with an A or A plus merit award and they don't have any private practice on the side.'

John Northrop agrees. 'In one trust I know, 14 people in the organisation earned more than the chief executive.

There is a lot of talk in the media about NHS managers being fat cats. I think they are more likely to be rather emaciated cats.'

Average pay levels for chief executives of private sector organisations with a turnover of£100m is around£142,000 including PRP and bonuses, with finance directors on£100,000, he adds. 'There is a huge and widening gap between public and private sector pay. The government cannot keep paying NHS managers a pittance.'

But Colin Pearson, organisation development director at Milton Keynes General trust and president of the Association of Healthcare Human Resource Management, does not believe that chief executives in the NHS are underpaid. 'They shouldn't be, ' he points out. 'After all, there are enough surveys around to enable remuneration committees to set a fair salary.' But he adds that making comparisons between chief executive pay rises and those of others in the organisation can be unfair because some 50 per cent of NHS staff are eligible for increments - unlike chief executives - which can add considerably to the basic salary.

Stuart Welling, chief executive of Brighton Health Care trust, believes his£102,000 salary is lower than it would be in the private sector. 'But when we embark on careers in the NHS we don't do it for the pay, ' he says. 'It is about doing a worthwhile job, job satisfaction, working for the community - public sector values.'

But he is fed up with the constant 'knocking' of managers and their pay. 'Every chief executive I know puts 100 per cent into the job - and the number of situations where a chief executive can lose his job grows by the day.

Organisations the size of ours don't run themselves. Last year my pay rise was 2 per cent, this year it is 2.5 per cent.

The remuneration committee takes the view that it will only give the pay rises we can afford.'

Frank Collins, soon-to-depart chief executive at Heatherwood and Wexham Park Hospitals trust, feels chief executive salaries are 'about right', compared with senior clinical colleagues on NHS terms and conditions and other public sector organisations, such as local authorities. 'But there is still a disincentive in the system which may dissuade individuals from considering certain chief executive posts, ' he says.

'It is evident that, generally, some of the smaller trusts - in budgetary terms - carry considerably smaller salaries than larger trusts. Yet the leadership challenges are as great. It is difficult for senior chief executives to want to move into these organisations if they are going to be disadvantaged.'

Hilary Scott, chief executive at Tower Hamlets Healthcare trust, does not feel underpaid on a salary of£71,000. But she agrees that many community and mental health service trust chief executives are comparatively poorly paid 'for work that is at least as complex and demanding as that in acute trusts'. There are also a disproportionately large number of women in the community and mental health sector 'which raises interesting issues about who gets appointed to what sort of job'.

When Wigan and Leigh Health Services trust appointed a new chief executive 18 months ago at a salary of£80,000, a member of staff wrote to the in-house newspaper to ask how such a salary could be justified when they were paid only£12,000 a year. 'We explained that we felt it was important not to make what would be a small economy for such a responsible job, ' says trust chair Andrew Foster, who also chairs the NHS Confederation's human resources committee. 'Trusts are complex businesses and you want the best.'

But Mr Foster acknowledges that the salaries on offer when trusts were first created generated bad publicity and proved not to be the best way of improving performance.

'We tried to emulate the private sector with performance related pay and bonuses of 15-20 per cent while other staff were getting far less in their pay awards, ' he says.

Remuneration committees should not be tempted to compare NHS with private sector salaries, he advises.

'What they do in the private sector is so different.

Remuneration committees should pay the appropriate rate in relation to the NHS market and keep their eye on the ball to see the way things are moving.'

Although Unison has criticised the level of increases in chief executives' pay, national officer Alistair Henderson says it has not been against the level of salaries. 'Chief executives should be properly rewarded for the large and complex jobs they do, ' he says.

But, although their salary levels are openly publicised, there should be much more transparency in the criteria used by remuneration committees in setting these levels, Mr Henderson argues. 'It is currently being suggested that all senior managers in health authorities, including chief executives, are job-evaluated. Surely it would also be possible to devise an evaluation system that can be used for chief executive posts in trusts? You would then get a fair reward for the chief executive, and other staff in the service would have more confidence in the process.'

The NHS Executive has introduced a new structure for pay and conditions of service for senior managers in HAs, which will be fully operational by 31 March 1999. Each new post created by HAs after that date will be allocated to one of five pay ranges. In order to judge where to place a post in one of the ranges, the employer needs to judge the weight of the job and take account of market factors, NHS Executive guidance says.

Penny Humphris, chief executive of Portsmouth and South East Hampshire HA, believes the new arrangements will give HAs greater flexibility but will not have an impact on chief executive salary levels. 'I think it will have a neutral effect on existing staff pay but will allow us to attract the right people for the job, ' she says.

She says that because trusts have the freedom to determine pay increases, while HA salaries are set within national guidelines, some 'quite big differentials' between chief executive posts in the two types of organisation have occurred in the past.

Top salaries in trusts are more competitive now but, compared with organisations of similar size and complexity,£100,000 is 'at the bottom end' of pay, says Ray Mailly, human resources director at Leicester City Hospital trust and a past president of AHHRM. 'We are competing against other organisations, particularly those in the public sector, so we have to maintain competitive salaries - for all staff, ' he says.

But if local authorities and other public sector bodies pay their chief executives as generously, if not more generously, than NHS chief executives, why is it only the latter who attract all the criticism? Stuart Welling believes it is because of the structure of the organisations. 'Everyone recognises that local authorities are democratically elected, so it is the councillors, rather than the officers, who get the blame for any problems. They are held to account by the public, ' he says.

In the NHS, chief executives are the accountable officers - so they get the flak.

Hilary Scott sees things differently. 'It is the way our elders and betters regard and represent management work, ' she says.

'Regrettably, ours are not staunch in their support of managers, unlike Marmaduke Hussey and Christopher Bland at the BBC and leaders of councils.

Ministers are only just starting to twig that their policy agenda is going to be delivered by the very people they have vilified over a long period .'

John Langran of NHS Personnel adds a further reason.

'The public perception is that NHS managers are in safe jobs - that they are feather-bedded public servants.

Nothing could be further from the truth. The rate at which NHS top managers roll is far greater than for managers in jobs outside the service. It is a very risky job.'

'Supertrust' chief with a£125k wage packet David Johnson (right) reputedly became the NHS's highest paid chief executive when he took up the post at Leeds Teaching Hospitals trust, the new£426m 'supertrust', in April. He earns a salary of£125,000.

The trust was formed from the merger of St James' and Seacroft University Hospital trust and the United Leeds Teaching Hospitals trust.

Once a hospital porter, Mr Johnson was previously chief executive at Jimmy's.

He believes it is important to consider the salaries of chief executives in private companies 'to give a perspective' on NHS chief executives' pay.

'But I don't think we should be paid the same as managers in the private sector. It is more important to look at what other public sector managers with comparable responsibilities, such as chief constables and local authority chief executives, are paid, ' he says.

However, Mr Johnson would 'take issue' with anyone who argued that his job, with its added political dimension, is not as difficult as that of a chief executive in the private sector.

How remuneration committees should work NHS Executive guidance recommendations The committee should operate independently from the board.

It should have clear terms of reference covering the composition of the committee and the matters to be addressed, such as pay and non-pay benefits as well as contracts of employment and severance packages.

It should have access to independent advice on remuneration levels elsewhere in the NHS and trends and developments in non-pay benefits and terms and conditions.

It should have access to information on the performance of the organisation, the remuneration packages it can afford and the auditor's requirements.

It should look at how its decisions are made public and their implications for the organisation's public image.

John Northrop, director of Pay and Workforce Research, says: 'Remuneration committees should compare a number of sources of data on pay.'

'Any one survey can be biased. Many are completed by the better-paying organisations. The skinflints tend not to complete them, so two or three sources at least should be compared.'