2005 - Non-executive directors’ fees
Two years after the Higgs review
of corporate governance led to changes in the
expectations of non-executive directors in UK-listed
public companies is it time to question whether
boards are any more effective today as a result?
One thing is certain: they are
much more expensive than they were before the
review. A report by Watson Wyatt, the pay consultants,
late last year found that non-executive director
fees had risen by 38 per cent in 2004 among those
FTSE 100 companies that had reviewed their fees.
The average fee at the time was £36,500,
based on an average commitment of 18 days a year.
But among those that had reviewed their board
pay, the average fees had risen to £40,000
The findings were anticipated
by an earlier survey of senior executives and
non-executive directors in 51 of the FTSE 100
companies, carried out by Russell Reynolds Associates,
the headhunting firm. It found that above-inflation
pay rises for board members had been paid out
in almost a third of those questioned.
When directors were asked to
name the ideal annual salary level for a FTSE
100 non-executive director the most quoted figure
was £50,000 between a range extending from
£35,000 to as high as £100,000.
The danger of this kind of research
is that it can become self-serving. With a few
individual exceptions, I know of no job anywhere
– from the office cleaner to the chief executive
- where the people doing that job do not think
they are worth more than they are paid.
The difference between office
cleaners and members of a board is that the cleaners
do not set their own pay rates or sit on committees
with the people who do. Another difference is
that, unlike boards, there is no vested interest
among those presiding over the staffing bill to
pay people any more than is necessary.
In fact parsimony is what passes
for good management among those who are responsible
for staff budgets. This message goes down the
managerial line of most companies. But the reverse
seems to apply in discussions about boardroom
pay. It is as if the boardroom occupies some parallel
universe where the normal laws governing working
practices are reversed.
To understand the rigour –
or lack of it - surrounding boardroom practices
you need only look at some of the comments from
that same Russell Reynolds report. The diversity
of opinions suggests that these well-paid guardians
of our top companies are uncertain about assessment
practices, although they tend to be united on
pay: most think they ought to get more.
Compare this small selection
On pay: “It needs to go
up, as the risks are greater these days,”
and “Clearly it will rise significantly,”
and “To get the quality you need to pay.”
On appraisal: “Everyone
marks everyone else,” and “I just
don’t agree with marking colleagues.”
On director’s targets:
“We go for collective targets. We stand
together,” and “[The] senior team
must be a team in philosophy.”
Almost four in five of those
consulted thought that the pay of non-executive
directors was not high enough. This seems extraordinary
given that the role is a secondary job for many
of them and that those who do this kind of job
after retiring from an executive post will be
using the income to supplement a pension.
There is no doubt that the job
has grown more onerous for those who chair committees
and the number of days devoted to a business for
all non-executives appears to be rising.
The top paid non-executive job
after that of the chairman is the chairmanship
of the audit committee. Miles Broadbent, founder
of the search firm, the Miles Partnership, says
that the highest paid audit chairman he has handled
was £120,000. That was in one of the big
banks. “A lot of companies pay a £10,000
premium for the other committee heads,”
One issue emerging for companies
whose executives are taking up non-executive jobs
is the time spent on the external role although
most seem to view this as a valuable way of comparing
notes with other company behaviours.
“For full time executives,
it is clear that taking no more than one non-executive
role is normally appropriate. For those with solely
non-executive roles, up to five or six is manageable,”
says Luke Meynell, head of the UK Board Practice
at Russell Reynolds Associates.
This might suggest there are
increasing numbers of openings for the kind of
lay directors envisaged by Sir Derek Higgs. Not
so. None of the recent reports on boardroom compensation
has found any significant rise in the number of
directors from anywhere other than senior executive
roles or from those who have recently retired
from senior roles.
Mr Broadbent admits that he keeps
an eye out for retiring finance directors. “If
you can get them positioned in an audit committee
chairman’s role while they are still fresh
from their executive job it makes the ideal move,”
A recent international comparison,
Korn/Ferry International’s Annual Board
of Directors Study that questioned nearly 1,000
directors in 14 countries, revealed a continuing
steady rise in the number of women and ethnic
minority directors in the past three years. This
reflects a desire for greater diversity in the
composition of big boards. But it does not extend
beyond the familiar corporate club. The proportion
of companies with academics on their boards showed
no significant increase in the last four years.
Mr Meynell confirms the lack
of interest in the recruitment of lay directors.
“Bringing in such people is not proving
easy,” he says. “As the committee
roles that each NED needs to fulfil become increasingly
complex and structured, the role looks less and
less one that people without specialist knowledge
can take on. And certainly we find that people
outside the traditional groups are not keen to
take on the legal responsibility that comes with
But are the legal fears overblown
when directors’ liability insurance is available
for board members? There has been only one big
negligence action in the US – against former
directors of WorldCom – and one current
negligence case in the UK - that of Equitable
Life suing six of its former executive directors
and nine former non-executive board members.
If changes in governance have
been for the better why does the collective confidence
of non-executive directors appear to have declined?
Just over two years ago when Independent Remuneration
Solutions, pay consultants, asked non-executives
if they thought they had enough collective power
to control a chairman or chief executive with
a large stake in a company, some 82 per cent of
them thought they had. But when the question was
repeated earlier this year the percentage had
dropped to 55 per cent.
The cost of compliance with the
Higgs recommendations was an average of £820,000
a board in the UK, according to the Korn/Ferry
report (and $5.1m per company in the US, on average,
for compliance with the requirements of Sarbanes-Oxley
Was it all worth it? Are big
boards run any better today than they were in
the past? Or are they just better paid? Where
can investors seek future moderation in pay? Another
review of corporate governance? Heaven forbid.
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