Board of Directors Salary

How Director Pay is Determined

Under the Corporations Act, shareholders of listed public companies must vote to approve the total pool of fees payable to all non-executive directors at the Annual General Meeting. This establishes the maximum total pot that can be paid. The board itself then decides how this pool is allocated between individual directors. Additional fees are often paid to directors who take on extra duties, like serving as board committee chairs. However, this does not mean these directors have more legal duties or liabilities. The full board retains collective responsibility for oversight and decisions.

In private companies, the Corporations Act states directors cannot receive payment for their services unless permitted by the constitution or approved by a resolution of shareholders. The Act includes a replaceable rule allowing director fees to be paid as determined by members' resolution. However, having no pay is also perfectly valid if agreed.

Establishing a Remuneration Committee

Larger public companies will commonly establish a dedicated remuneration committee composed mainly of independent directors. The committee develops remuneration policies and practices, reviews current pay levels, and makes recommendations on appropriate director fees to the full board.

Having a specialist committee allows more time for thorough analysis of competitive benchmarks, alternative structures, performance links and regulatory considerations. They can obtain remuneration consultant advice on structuring pay packages. These committees also consider the alignment of director remuneration with the long-term interests and risk policies of the company.

Under ASX Corporate Governance Principles, listed companies included in the S&P/ASX300 index must have a remuneration committee. Smaller listed companies can instead have board processes permitting all directors to deal with remuneration issues. Private proprietary companies are not legally required to have remuneration committees, but some larger private companies choose to adopt this governance practice.

If a listed company does not follow the ASX recommendation to establish a remuneration committee, it must explain why not under the "if not, why not" reporting regime.

Factors Influencing Director Salary

When determining appropriate directors' fees, considerations include:

Company Factors

• Size and complexity of operations
• Industry sector
• Risks and challenges
• Number of board committees
• Profitability, shareholder returns and other performance measures
  

Director Factors

• Qualifications, skills and experience
• Time commitment required
• General contribution and involvement in decision-making
• Any extra responsibilities such as committee chair roles

External Factors

• Business conditions and economic outlook
• Director remuneration trends and competitive benchmarks
• Supply and demand dynamics in the market for qualified directors

Recruiting skilled directors is competitive, but due to increased workloads many directors are reducing the number of boards they serve on. Rising demand combined with shrinking supply places upward pressure on remuneration.

Remuneration consultants are often engaged to research competitive pay levels in comparable companies and advise on structuring remuneration packages. Under the Corporations Act, consultants must be appointed by and report directly to non-executive directors or the remuneration committee, not management.

Remuneration Structure

ASX Corporate Governance Principles state non-executive directors should be remunerated by way of fixed fees, not variable performance-based bonuses. Retirement benefits beyond compulsory superannuation contributions are not advised. Equity-based remuneration may align interests with shareholders but needs prudent limits given non-executive directors have a governance oversight role.

Typical fee structures include:

• Annual dollar amount
• Payment frequency eg monthly, quarterly, or annually
• Cash, non-cash benefits, super contributions
• Base fee plus extra fees for committee chairs etc

The Principles recommend executive director and senior executive pay contain an appropriate balance of fixed and performance-based components like bonuses or equity-based schemes. Contracts should address termination payments.

There is no definitive optimal remuneration structure. Arrangements should be tailored to the company's circumstances and strategy. However, transparency and clear disclosure around structures aimed at driving performance are key.

Disclosing Remuneration

Listed public companies must present an annual remuneration report to shareholders showing remuneration policies, senior executive contractual terms, and actual remuneration paid to directors and key management personnel.

The Corporations Act introduced a "two strikes" rule, meaning a 25% or higher "no" vote on the remuneration report for two consecutive years leads to a spill vote on the full board.

This aims to increase accountability around pay. However, shareholders lack direct power to cap remuneration levels. They can vote down pay reports or spill the board, but cannot approve or veto actual dollar amounts paid.

Legal Considerations

Financial services companies regulated by APRA face additional governance requirements set out in APRA's Prudential Standards. These standards form part of a broader regulatory framework aimed at ensuring sound remuneration practices in the financial sector. Remuneration policies must align pay with prudent risk-taking, incorporating risk adjustments and deferral periods allowing outcomes to be reliably measured.

Proposed "clawback" reforms would allow shareholders to treat bonus clawbacks following a material misstatement as a “strike” against the remuneration report, heightening accountability.

Taxation of director remuneration is complex, depending on factors like personal versus company income. Directors should seek tailored professional advice on payment approaches aligned with their personal situation.

Conclusion

Determining fair and responsible director remuneration requires balancing multiple factors. Market forces are driving fees higher, but excessive pay undermines governance credibility. Clear disclosure, performance links, and accountability to shareholders are crucial for building public trust and confidence. Adopting leading practices will help organisations secure qualified directors without overstepping community expectations.