MM&K survey highlights trends in NED remuneration

The MM&K survey, Life in the Boardroom, (now in its 24th year) is an authoritative survey which is supported by the Quoted Companies Alliance. Thanks to this support, nearly 400 chairmen and non-executive directors (NEDs), holding over 1,000 appointments, completed the questionnaire, providing fee and time data and views on topical subjects. 

Survey Key Findings:

• Chairmen and NEDs are generally paid a fixed fee. Larger companies pay committee fees on top of the basic fixed fee.
• Fees paid vary considerably depending on company size, time commitments and many other factors.  MM&K finds the most useful way of comparing fee rates is to compute the notional daily rate.
• NEDs are typically paid the equivalent of £1,110 to £1,300 per day. Larger companies pay more – around £1,800, with the very largest paying £2,800 per day.
• Fee rates for chairman are generally somewhat higher, increasing to over £3,000 per day for the largest companies.
• 38% of chairmen and NEDs feel that fees have not kept up with increased responsibilities, personal risk and time demands. 
• A small minority of chairmen (23%) and NEDs (11%) receive share options. The UK Corporate Governance Code discourages options for non-executive directors and the majority of the options granted are in AIM-listed companies where the Code does not formally apply.  They are a useful form of cost-effective remuneration for directors of smaller companies, particularly in start-up and fast growth situations.
• Directors spoke of the need for “cognitive” and “cultural” diversity in the board, rather than a politically correct gender or ethnic diversity.  It was evident from responses that a mix of experience from different environments is important. 37% of companies now use executive search as the preferred method for finding new directors.
• Survey respondents sometimes hold diametrically opposed views on issues, a warning that all companies are not the same and different company circumstances need very different solutions.
• A significant minority of NEDs feel frustrated because they don’t receive adequate information or have enough time to make sound decisions.

Table A below shows the median fees and median commitment of time for chairman and NEDs in 142 main market and 145 AIM listed companies for various brackets of size by turnover. The survey reveals that the additional days in larger companies is chiefly spent in extra committee time: a result, no doubt, of the additional complexity of audit and remuneration issues.

The notional ‘daily rate’ = total fees divided by days spent per year.

38% of chairmen and NEDs said their current fees were too low, given the current demands. This is not a high figure as surveys go – most employee surveys show around 50% of employees feel underpaid. But what is telling is that the dis-satisfied directors say the problem is that their fees have not kept pace with increased responsibilities and time demands. In reality, although time demands have crept up in the past couple of years, they have not regained the levels seen in the couple of years immediately after the credit crisis. The figures seem to suggest that the real issue is increasing regulation and personal risk coupled with a sense that executives have done much better. The median (the middle) chairman and NED fee increase in all but the largest turnover categories has been zero in the past 18 months (although average increases between 3% and 7% in the different size categories reveal that a few companies have awarded substantial rises.) 

NEDs no doubt read press reports suggesting that executive directors are getting increases in excess of 20% per annum. Such reports are misleading since they include the increase of the price of share incentives awarded some years ago and use highly selective comparison samples.  In truth, the database of the proxy advisory company, Manifest, shows that remuneration awarded to FTSE 100 chief executives has actually gone down in the past couple of years.

But it does not alter the fact that time commitments vary widely and sometimes the demands on NEDs can be excessive and need to be rewarded.  Whilst very few UK directors would prefer to be paid on the “US model” of a retainer plus fees for recorded time, there clearly needs to be a provision in appointment letters for extra payment in situations where the demands become exceptional.

This article was written by Damien Knight, a Principal at remuneration consultancy MM&K. Life in the Boardroom, the MM&K 2014 survey of chairmen and non-executive directors, may be purchased from Tracy.Smith@mm-k.com at a price of £1000 for corporations and professional firms and a concessionary price of £250 for individual NEDs buying a personal copy. For more information about the survey and its results, please contact Damien on 020 7283 7200. MM&K Limited is authorised and regulated by the FCA.