What Is A Fair Day's Pay?

by Philip Higginson, CEO ProNed

“Remunerate fairly and responsibly”
ASX Corporate Governance Principle No.8

The Principle goes on to say that companies should ensure that the level of compensation of remuneration is sufficient and reasonable and that its relationship to performance is clear. Whilst this comment is principally aimed at executive compensation there is no reason why the same should not apply to the non-executive team, with the exception of course that the board acts as a collegiate whole and individual non-executive director performance should not determine the level of fees for all members. The level should be set as though all directors are performing admirably, and adding the requisite value to the company.

We have not yet seen a non-executive director take on the responsibility of being a director for the money – in fact should this be a matter of undue interest from the prospective candidate, Proned would normally exclude that director from further involvement in the selection process. If a director has to rely on board fees for their way of life they make a poor director and will often back down under pressure and be incapable of being both independent and fearless.

However all directors of quality expect the compensation to be fair and equitable. ProNed spends a huge amount of time and financial resources studying non-executive remuneration and our Director Remuneration Report is the most often sought after tome for NED remuneration in Australia. We are constantly being asked “when is the next report coming out” even only months after the ‘old’ one is issued, such is the interest and demand. Most first-class executive remuneration consultants purchase a copy of our report, which we gladly provide knowing that the information is used within their assignments covering both the board and the executive assessments.

Non-executive directors have traditionally been paid poorly and the old adage “pay peanuts and you get monkeys” resonates loudly within the director community. Shareholders often have trouble coming to grips with what is a fair value to be placed on part-time "employees".

As the role is becoming far more professional as distinct from a reward for previous service or loyalty more value is placed on the role by shareholders, and as the expectations increase for even greater professional standards, the consequent demands that are made of independent directors, and the duties and liabilities that will become even more onerous, the remuneration of directors will need to come further into line with what could be reasonably deemed a proper reward for their skills and their time commitment.

Remuneration levels will continue to vary widely across companies, according to the size of the company, the industry in which it operates, the time commitment expected from directors and the quality of person appointed. Obviously a NED on an ASX Top 200 board will receive greater compensation than a director on the board of a small privately owned company.

In addition to our bi-annual Director Remuneration Report, ProNed also offers specific remuneration reviews tailored to a company’s particular needs where we will individually interview the board (or a selection of it), assess the level at which it operates (that is the complexity of the business and the complexity of the decisions the board makes), and all other pertinent factors, and compare those to a basket of companies that the client considers to be relevant to be compared against (often it’s competitor group). This provides the board with the knowledge that it will be able to attract the right quality directors and that their competitors will not have the ability to attract significantly better quality directors.

Boards need to review their remuneration annually (as the executive expect to do so), not leave it for any lengthy period where appropriate ‘catch-up’ is nigh impossible and be continually advising their constituency of the value they are adding to the company’s progress.