Non-executive director remuneration: pros and cons of remuneration with equity or options

 

Do you have a stake in your company?

As a non-executive director, you’ll know that NEDs contribute so much to the delivery of a company’s mission. Given NEDs’ substantial and measurable contribution, should they consider holding shares or options as part of their reward alongside a day rate?

 

It might surprise you that the answer could be yes.

From a personal perspective and a company perspective, there are benefits to be had from giving NEDs a slice of the pie.

When looking for your next role, or when next negotiating your contract, it might be useful to understand that holding shares or options (‘equity’) can be a powerful lever for company growth.

If you’d like to know more, read on…

 

Transforming your relationship.

As a NED, you’ll be involved in top level strategy. If you are invested in a business, you’ll be strongly placed to make decisions that prioritise long-term prosperity. Personal investment can be forged with share or option holding.

As a NED, you’ll thrive to bring your best to the table every time. Studies have repeatedly shown that if somebody has skin in the game, it has a transformative effect on their relationship to the business.

Instead of being purely transactional (you are paid £X for twenty days per annum for example), you become an active participant in the continuing success of the company. It becomes a personal daily objective to drive advancement and profit.

Equity incentivises, motivates, and aligns. And on an individual NED level, holding equity also demonstrates confidence and commitment to the company mission. It is also a trust factor if the company is looking to attract investors and funding.

If you become a shareholder, you won’t just be taking your fee, you’ll also be shouldering a percentage of the risk. If you believe in a company, why wouldn’t you do this?

It is obviously the case that for some, holding equity might not always be an option, especially if you follow the provisions of the UK Corporate Governance Code. For some companies, NEDs holding equity is seen as compromising to NED independence. But if this isn’t the case for you or your company, a share scheme could really help your commercial growth strategy.

 

The business case.

If you’d like to negotiate for equity but you’re not sure how to pitch this to the executive board, there’s a compelling (and comprehensive) business case in your corner.

Enterprises that offer shares and options:

• are, on balance, more successful, competitive, profitable, and sustainable. This authoritative study (The Ownership Effect Inquiry: What Does the Evidence Tell Us? by The Ownership Effect) found that businesses that shared equity saw greater sales and greater performance over a long time horizon and greater resilience during downturns.
• The same report demonstrated that share and option holders are more entrepreneurial and committed to the company and its success.
• Equity helps to attract talent and retain it for longer.
• Independent research by the Employee Ownership Association suggests that shared ownership delivers superior business performance (The Employee Ownership Top 50, Employee Ownership Association in partnership with Capital Strategies).
• Shareholders are more willing to go out of their way to consult, share information and drive to innovative solutions, if for no other reason than to share in the reward.

For best results, it’s a good idea to offer equity widely and to the whole team (the size of the award can be tailored to the individual), but at the very least, sharing with key staff can have a dramatic effect.

When it comes to NEDs, the business case is even more acute for SMEs. NEDs are not employees and often juggle their duties with a portfolio of other activities, or a day job in management.

If a company wants you to prioritise them, it’s an excellent idea for them to offer you additional incentives to keep your focus firmly on their activities.

There’s also a financial benefit for businesses offering NEDs equity. You could negotiate a reduction in your day-rate as quid pro quo for the equity. Again, this can be tailored to your level of confidence in the future of the business and works very well for resources constrained start-ups and scale-ups. You might only be willing to put a small proportion of your reward on equity… but high confidence in the business and what you can bring to the table could turn that right around.

You can be as flexible or agile as you like in terms of how much of a rate reduction/equity slice you’d ideally like. You get a cut of the business, they get to save money on your upfront fees. Perfect.

 

You’ve negotiated your cut, now what?

Once you’ve come to an agreement with the board, what’s the best way of securing your equity in the most economic and efficient way?

There are a lot of factors to consider, but as a NED, you’ll be looking at Growth Shares if you are engaged with the organisation as an individual.

They can be conditional which means, in a nutshell, that you can set milestones that need to be hit to release your equity reward.

 

Quid pro quo. Everybody wins.

This could be time served or certain growth or sales figures achieved – the conditionality is entirely flexible. Importantly though, this could serve as extra leverage for you in terms of securing equity from your company.

If the board has assurance that they can only win from the arrangement, that removes one big barrier from their perspective.

 

Taking the next step.

Once you take the persuasive psychology that sits behind this whole subject into account, it should be clear that there are clear benefits in NEDs enjoying a cut of company equity.

Nothing drives growth like tangible personal investment, and nothing achieves personal investment like shares or options.

 

Ifty Nasir is founder and CEO of Vestd, the UK’s first, most advanced and only regulated digital share scheme platform for SMEs. The platform was specifically designed and built to help SMEs launch and manage share and option schemes. Customers benefit from ongoing access to our in-house team of equity experts. If you’d like to know more, you can browse our helpful free guides here.

 

This blog is sponsored by Vestd.

 

Related post: What can you expect as compensation for a non-executive director role?

Related post: An investor’s letter to its shareholders

Related post: Remuneration Committee Board Best Practice®

 

If you are a company looking to benchmark your directors’ fee, please email [email protected].

Not yet a member, join us today and access insights into NED compensation and remuneration data.