How much should I get paid as a non-executive director? How much should we pay our non-executive directors?
These are the two sides of the same coin when it comes to compensation of non-executive directors. NEDonBoard, the Institute of Board Members gets routinely asked these questions, from companies seeking to appoint NEDs and directors themselves. In this blog, we provide elements for companies to think about NED remuneration. This blog is equally helpful to NEDs looking to set their rates.
Factors influencing compensation
The compensation paid to NEDs varies considerably from £0 to hundreds of thousands of pounds. Factors may be company specific, such as industry, sector, size, maturity and complexity. Financial resources available for NED pay also matter.
Additional factors impacting compensation level are:
- NED experience
- time commitment associated with the role
- board committee responsibility such as chair or member of a board committee
What does the code says about NED compensation?
Provision 34 of the 2018 UK Corporate Governance Code: “The remuneration of non-executive directors should be determined in accordance with the Articles of Association or, alternatively, by the board. Levels of remuneration for the chair and all non-executive directors should reflect the time commitment and responsibilities of the role”.
Principle 5 of the Wates Principles for Large Private Companies says: “Appropriate and fair levels of remuneration help companies to secure and retain high-quality directors, senior management and their workforce. Remuneration for directors and senior managers should be aligned with performance, behaviours and the achievement of company purpose, values and strategy. In setting director and senior manager remuneration consideration should be given to remuneration throughout the organisation to reinforce a sense of shared purpose”.
What regulations apply?
There are several regulations that apply to NED pay and more broadly to directors’ remuneration, in addition to the Code.
- The Companies Act 2006, through the model articles of association. The model articles can be amended to create more tailored and bespoke rules for the organisation. The Act sets out requirements for listed companies, including the obligation to prepare a directors remuneration report.
- Companies (Miscellaneous reporting) Regulations 2018 applies to listed companies. Such regulations were amended by The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 to extend certain obligations to large private companies. For organisations falling under the 2019 Regulations, they have to report to their shareholders on their directors’ remuneration policy and report. Shareholders have a right to approve or reject the remuneration policy. They also have a right to approve the remuneration of the directors (executives and non-executives) annually.
Whose responsibility is it to set NED pay?
The board is responsible for determining remuneration policy as well as the level and structure of compensation for both directors and senior executives. But shareholders ultimately approve the remuneration of non-executive directors: they approve the articles of association and vote the directors’ remuneration policy.
Some organisations have established a remuneration committee. By delegated authority from the board, the remuneration committee establishes the remuneration policy for executive director, senior management, and chair of the board.
Most remuneration committees appoint consultants to advise on compensation matters, including NED and chair pay. If you use remuneration advisers, then the annual report should explain the appointment process of the consultants, disclose the cost of the services, and confirm their independence.
What is the structure of NED compensation?
Directors can be compensated through fees, salary, pension or through other benefits such as share, or by a combination of all of these. Provision 34 of the 2018 UK Corporate Governance Code asks that: “Remuneration for all non-executive directors should not include share options or other performance-related elements”. But share schemes may be helpful for organisations that have limited financial resources, such as start-ups or businesses scaling up their operations.
Working for free
It is common for first-time non-executive directors to not receive any compensation for their services to gain experience. The best route to build a portfolio of NED roles is to start with the non-for-profit sector. The Charity Commission does not allow the remuneration of trustees for being trustee. Charities that pay their trustees are allowed to do so by their governing document, by the Charity Commission or by the courts. Section 67 of the 2005 Act of the Scottish Charity Regulator states that a charity trustee must not be remunerated from charity assets unless certain conditions are met.
However, not-for-profit organisations such as NHS trusts, trade associations or housing associations remunerate their non-executive directors.
How to set NED pay? How do you assess the right level of pay for NEDs?
Recommendations for established organisations
As mentioned above, most organisations appoint consultants to benchmark NED pay. If this isn’t available to you, here are a few recommendations:
- Subscribe to the NEDonBoard newsletter (free) who features 3 roles on offer every week. Information on pay is made available. You may also join as a member and access the jobs board with all information (company name, time commitment, responsibilities, compensation).
- Research the annual report of organisations in a similar sector and of a similar size that publicly disclose their directors’ remuneration.
- Use your network to get data.
- Read publicly available reports, such as publications from the Commissioner for Public Appointments or executive search firms. NED pay information is available for all listed companies, so data is available for FTSE and AIM companies.
Recommendations for organisations getting started
Low compensation is better than no compensation. You will also attract stronger applications. Most non-executive directors have a portfolio that includes pro-bono roles in the charity sector and want to complement those with paid opportunities. For example, we see organisations offering an initial £250 per day fee, which can increase as the input from the NED leads to higher and more sustainable cashflows. Think dynamically.
Think holistically as well. What other forms of compensation can your organisation offer? Could access to your products and services be attractive to prospective non-executive directors?
Remember that NED pay results from a negotiation between an organisation and a NED. Aim for a compensation commensurate with the expertise and knowledge you will receive.
Should you have any questions on NED compensation
- If you are an organisation, email [email protected].
- If you are an individual, schedule a session with one of our consultants to join as a member. For information about the tax treatment of NED compensation, a module is included within the NED Accelerator® Programme.
Written by Elise Perraud, NEDonBoard COO.