Should NEDs be Paid More?

As the extra responsibility, time commitment and reputational risk continues to reshape the role of a non-executive director, one may question whether it’s time to change how NEDs are remunerated. Should pay be more reflective of the greater workload, or could this lead to a conflict of interest?

David Dumeresque, Partner at executive search firm Tyzack, says: “People attacked NEDs, most notably those on the boards of HSBC and Tesco, for not knowing what had gone on during company failures. We felt this was actually expecting a new level of knowledge – NEDs hadn’t even thought about some of the issues they were questioned on.”

As a result of this increased scrutiny, David argues that NEDs are required to be more involved in the business, in part to protect themselves if things go wrong. “It’s important to make sure NEDs are properly remunerated,” he says. “If pay stays static and potential reputational risks increase, it’s likely that fewer people will want to be NEDs, or the wrong people will be NEDs because they won’t fully understand those risks.”

According to Andrew Minton, Executive Director at Criticaleye, the true value of a non-executive director lies in their input around strategy: “By sharing their knowledge, on for example digital transformation, talent management or international expansion, NEDs can move the conversation around the boardroom table onto bigger strategic issues, helping secure the future of the business.

“NEDs should be properly compensated for their time in the role, but there is a balance to maintain – the last thing you want to do is bring the independence of a non-executive director into question.”

Criticaleye spoke to a mix of non-executives to find out their opinions on this complex issue:

Olivia Dickson, Non-executive Director at FTSE 100 financial services concern Virgin Money:

While NEDs of financial services (FS) companies are typically paid more than their non-FS counterparts, the difference does not fully reflect the additional time it takes to fulfil regulatory responsibilities.

The underlying, historic issue is the inflexible structure of NED remuneration. In financial services, fees do not typically flex as the demands on a NED’s time changes with different circumstances. Furthermore, the ethos of collective responsibility among the board has historically driven NED remuneration to minimise differences in pay between members with different responsibilities.

I expect to see more flexibility in NED reward structures emerging, with fees for those chairing committees increasing to properly reflect the time, skill and knowledge required, as well as the increased accountability and personal liability associated with the introduction of new regulatory regimes.

The current inflexible reward structure for NEDs seems to be from a previous era and out of touch with the demands and liabilities of NED life in the 21st century.

Bernie Waldron, Criticaleye Board Mentor, and Non-executive Director at several companies, including Servelec Group and private equity-backed IT and communications company Node4

I’m not currently pursuing any FTSE 250 roles because I think the enjoyment level, reward and hassle are out of sync. There are a lot of great public companies but private equity-backed companies, where there is financial alignment and a more focused objective, are on balance more enjoyable places for many NEDs. This reduces the NED talent pool available to public companies.

The NED remuneration structure for UK public companies makes no sense to me – normally all that’s available is a fee. You can buy equity at the market rate, but you don’t have any options that put you in the same boat as the executive team.

I understand the argument – this is done to reinforce independence – but I don’t agree with it. If you’re worried that giving your NEDs a financial interest in the company, which would align them with the investors and the executive team, could cause them to preside over fiddling the books, then you’ve got the wrong NEDs in the first place.

Geraint Anderson, Senior Independent Director at Volex, which is listed on the FTSE Fledgling Index: 

A significant increase in fees could be a big problem for employees and shareholders. For the amount of time you’re putting into it, the rate per hour is not attractive but you’re not there to make money for yourself, you’re there to add value and hopefully you enjoy being involved.

I do see the case for an increase in compensation related to time but I’m not in it for that. I stepped down from my exec role in 2014 in order to pursue a plural route, the first being Senior Independent Director and Chairman of the remuneration committee at Volex. Being the chairman of a Remco takes significantly more time than in the past, due to disclosure and interaction with shareholders, so you have to be careful not to over commit your time.

If you’re going into this purely to make money, you shouldn’t be doing it. Share incentive schemes, for example, would be highly wrong and would blur the line between the non-execs and execs.

Gareth Davis, Chairman of FTSE 100 building materials distribution company Wolseley

It’s fair to say that over the past five or six years there has been a step change in the responsibilities of NEDs, but no corresponding change in remuneration as far as I can see. As long as the fees are fixed and of a reasonable amount, I think an increase makes sense as it acknowledges the additional work they have to conduct, especially if they are chairing the audit and remuneration committees.

In terms of the amount of time you must commit, you’re looking at about 25 or so days a year. For a committee chairman it can be anything up to 35. In financial services, it’s going on for a full-time role.

Many companies haven’t kept pace but I’m not talking about huge increases here. The fees should be fixed and reasonable and, of course, there must not be any element of variable pay as that brings independence into question.
By Dawn Murden, Features Editor- Advisory

Do you have a view on this subject? If you have an opinion you’d like to share, please email Dawn at dm@criticaleye.net

https://twitter.com/criticaleyeuk

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