How Do Board Members Get Paid?

Directors' Fees and Executive Pay

It's important to differentiate director fees from executive remuneration. Directors receive fees for their governance role on the board. Executives earn salaries and bonuses as employees of the company.
Some directors are also executives, usually the CEO and possibly the CFO. These executive directors receive standard director fees for board service plus executive pay. Their executive remuneration is detailed in employment contracts, while directors' fees require separate shareholder approval.

Approving Fees

For public companies in Australia, shareholders must approve the total fee pool to be paid to the board of directors. This approval comes through a resolution put forward at the company's Annual General Meeting (AGM).

The resolution sets a maximum total cap on director fees that establishes the ceiling for overall board compensation. However, the specific allocation of this pool among individual board members then falls under the discretion of the board itself.
For example, a resolution may propose that total director fees shall not exceed $500,000 in the coming year. If approved by shareholders, this authorises the board to then divide that $500,000 total as they see fit between the chair, other directors, and any relevant committee roles based on responsibilities and time commitments.

This process grants the board latitude over internal allocation while still empowering shareholders with oversight authority on the size of the aggregate fee pool. Shareholders only need to vote again if the board puts forth a resolution seeking to increase the overall cap on director fees.

Public companies in Australia must provide shareholders a detailed remuneration report at each Annual General Meeting. This report discloses the policies and structures for both director pay and executive compensation. It explains the relationship between pay amounts, company performance, and value delivered.
Inclusion in the remuneration report provides visibility into director compensation for shareholders. It also motivates boards to carefully explain their approach to director pay packages.

Excessive fees lacking justification or misalignment with company performance would raise shareholder concerns. The transparency empowers shareholders to take action like voting down a proposed increase in the fee pool if remuneration practices raise red flags.

Additionally, under the "two strikes" rule, a 25% or higher "no" vote on the remuneration report for two consecutive years can force a shareholder vote on spilling the board. This further pressures boards to pay close attention to how director pay policies and structures will appear to shareholders.

Role of the Remuneration Committee

Many large public companies have dedicated board remuneration committees. These committees take the lead on developing pay policies for both directors and executives. They analyse compensation data to determine if current pay structures and amounts align with company performance and shareholder interests.

The remuneration committee surfaces recommendations on the overall size of the director fee pool for the full board to review. The committee may also suggest changes to how the pool is allocated between directors.

However, the full board retains responsibility for final decisions on pay. They must review and approve the committee's recommendations before director compensation moves forward. While encouraged, remuneration committees are not mandated for smaller public companies under ASX guidelines. However, these smaller boards should still dedicate time to consider the same compensation issues a committee would review.

Financial companies regulated by APRA face additional requirements regarding remuneration policies. Their policies must be designed to align pay with prudent risk-taking. Performance-based compensation elements must factor in time horizons and risk outcomes when determining payouts.

Guiding Principles for Fee Structures

When evaluating and designing compensation structures, ASX corporate governance guidelines recommend that boards:

• Clearly distinguish non-executive director pay from executive pay packages
• Pay director fees only in the form of cash, benefits, or superannuation contributions – not equity or performance-based bonuses
• Avoid providing retirement benefits beyond customary superannuation

These principles aim to separate non-executive director pay from executive incentives. They discourage bonuses that could cloud director objectivity regarding executive performance.

In terms of allocation, common practice is paying board chairs more than other directors to reflect their greater workload. Committee chairs also typically earn higher fees given their additional duties. However, all directors share collective board responsibilities. Pay differences should reflect workload, not status.

When assessing appropriate pay levels, boards should factor in attributes specific to the company, such as:

• Company size, complexity, risk profile, and profitability
• Industry sectorBoard workload in relation to committees and overall responsibilities
• Qualifications and experience required of directors
• General market conditions and economic environment
• Shareholder opinions expressed through say-on-pay votes at AGMs

Certain practices are not recommended when structuring director pay, like paying higher fees solely based on tenure length rather than current value added, or providing special pay boosts without clear justification. Moderation and judiciousness, with clear linkage to contribution, build shareholder trust. Explaining any special accommodations for unexpected workload spikes is also advisable.

Compensation that appropriately acknowledges director contributions, attracts qualified talent, and incentivises engaged stewardship is in the best interests of shareholders and the company alike. However, excessive or unchecked pay practices undermine confidence.

By blending transparency, moderation, and focus on contribution – not status – boards can strike the right balance on director pay.