John Egan explains why a number of variables make it difficult to predict the course of director remuneration in the next year.
It is difficult to provide a general outlook for what will happen to director fees in any one year. This is not due to a lack of information or ability to forecast. Rather, it is because the position of director covers a vast collection of roles in different organisations and sectors.
These include companies that are listed, those preparing for an initial public offering (IPO), those held by private equity and investment banks, those retained in private ownership or those that are unlisted and public. There is also the broader spectrum of not-for-profit (NFP) organisations and government-owned enterprises.
Depending on the group to which they belong, organisations will have varying strategies in relation to the payment of directors based on scale, industry sector, geographic footprint, market positioning, capacity or willingness to pay, expected director time commitment and, increasingly, the organisation’s performance. Within this context we offer the following observations for 2015.
The broad market adjustment in directors’ fees will likely be in the range of 2 to 4 per cent. Some organisations will determine that there will be no increase given current circumstances; others will consider it necessary due to acquisitive initiatives, increased demands on directors’ time, the period since the last increase (in some cases more than three years), or an enlarged international footprint to increase fees by 6 per cent or more to both attract and retain directors with relevant backgrounds.
In the NFP sector we will see minimal change in fee levels. In the government sector, given the restraint that is being imposed in relation to staff salary increases, fee increases are unlikely to exceed 2.5 per cent and in many environments they will be frozen at prevailing levels.
Remuneration in these sectors is not a primary driver of commitment, with both instead relying on the willingness of qualified individuals to contribute to the broader community (and to their credit, individuals with outstanding records have generously made themselves available). Even so, we believe remuneration will have an impact on the talent available for appointment, especially if the current gap between fees for these sectors and the for-profit sector widens.
Key issues that may affect fee levels across sectors are:
- The management of superannuation contributions. There is a significant array of practices. Some companies establish a fee within which the director meets the obligation under the legislation. Others pay an additional benefit at 9.5 per cent of the entire fee or contribute up to the limits of the legislation. Where directors serve on multiple boards and their contribution exceeds the limit under legislation, they often elect to receive the contribution as remuneration.
- The degree, if any, to which directors’ rewards are aligned to those of management. Even though the drivers and structure of executive and director pay are different, we have noticed that when pay freezes or aggressive adjustments are imposed on management due to an organisation’s relative prosperity, directors’ fees often follow suit, creating an indirect relationship between director fees and company performance.
- A realignment of board and committee accountability. The determination of whether the accountability for risk, governance and nomination should rest primarily with a committee or with the entire board will be reflected in any increases to retainer and committee fees.
- The extent to which directors are remunerated in equity. In cash-poor start-up organisations, directors often receive modest cash payments and are issued options, generally without performance hurdles attached. This practice has the potential to become more broadly used given proposed taxation changes for employee share schemes.
- Increasingly global and mobile boards. The primary domicile of the director, the location of board meetings and the organisation’s expectation of attendance via teleconference or video link, rather than in person, also impact on director fees.
- A growing gap between executive total reward and director fees. Recent research conducted by Egan Associates found that, based on hourly rates, executives are taking a significant pay cut when they become non-executive directors (NEDs). A CEO is paid roughly as much in fixed remuneration as all of the non-executive members of the board put together. When variable remuneration is added the difference becomes more marked.
To match even a CEO’s fixed remuneration, a NED would have to serve on seven to ten boards, which could compromise their contribution and would breach governance guidelines of key investors and proxy advisers that directors should serve on no more than five or six boards.
Although we are uncertain whether or how the gap will affect fees in the short term, we believe it is an important factor in the availability and capacity of candidate directors, which will be a driver of future fees.
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