Key figures on the board of the Further Education Development Agency (FEDA) say they understood chairman Ken Young was not being paid because as a charity the organisation is explicitly forbidden to pay board members.
However, under an arrangement set up with the knowledge of Mrs Shephard, Mr Young receives his salary from FEDA's subsidiary company, FEDA Trading Ltd.
The revelation, which will also come as news to college managers, has caused anger in the sector, since colleges have been told by Mrs Shephard they cannot pay board members anything but expenses except with her permission. None has yet been granted.
The agency's public subsidy - Pounds 5 million in 1995-96 - already causes resentment among some in the sector who feel the cash could be spent directly on colleges. FEDA, which researches and provides support to colleges on curriculum and staffing issues, also earns cash by selling its services.
The payment row has embarrassed agency chiefs, who claim they were not aware the board was in the dark over the issue. In its strategic plan, FEDA states its intention to be "an independent voice grounded in rigour, openness and accountability".
Chief executive Stephen Crowne admitted that "with hindsight, it would have been better to make much more explicit earlier what the current position was". He inisted there were no probity issues raised by the "misunderstanding" over the payment. He said: "It is clearly standard practice for the chairmen of national bodies to be remunerated for the time they spend."
The Department for Education and Employment confirmed that Mrs Shephard had approved the salary. Mr Crowne said that Mr Young, former chairman of the Student Loans Company and Mrs Shephard's own choice of candidate for chair when the agency was set up in late 1994, had agreed to take up the six days a month post on the understanding he was paid.
Prominent agency board members are now demanding to know how the alleged omission occurred. They claim even the agency's finance committee was not aware of the payment. When The TES contacted the agency, managers produced a draft FEDA budget from December 1994 as evidence that the board had seen details of Mr Young's salary. The document, given to the board at a meeting, contains a list of salaries, including the chairman's.
However, board members said the draft was merely an indicative budget and had never been discussed or agreed. Moreover, they had dismissed the figures as they knew FEDA, as a charity, could not legally remunerate its board.
Mr Crowne said FEDA's charitable status was not relevant at the time of the meeting, since until April 1995 the new agency's budget was directed through the Further Education Funding Council. He insisted the draft budget had been approved by the board.
Lawyers had advised the agency to use a trading company as a mechanism to pay Mr Young, Mr Crowne said. However, FEDA had also been negotiating with charity commissioners over how the chairman might be remunerated directly through the agency.
The Association of Colleges pointed out that FEDA, with a Pounds 7 million budget, is a smaller operation than many FE institutions. Almost half all college chairs of governors preside unpaid over organisations with higher budgets.
However, pleas by the AOC's parent organisation, the Colleges' Employers' Forum, for lifting the ban on paying college governors were rejected by Mrs Shephard.
AOC chief executive Roger Ward said revelations over Mr Young's salary would lend support to his view that college corporations should be allowed to pay their chairmen.