Independent director remuneration – how much should you pay?

Director remuneration can be a step in to the unknown, especially for boards embarking on independent governance for the first time.

Directors are primarily paid for their insights and knowledge, rather than the number of hours contributed.  This can require a change of mindset for business owners. Directors also need to be rewarded for the risk they are exposed to, especially in the areas of company  solvency, health & safety and personal reputation. Remember a director is responsible (and liable) for the business 365 days a year, not just the day of the board meeting. Good directors are thinking about their companies continuously.

If you get to a point of questioning the value you are receiving for the remuneration you are paying….then you probably have the wrong director.

__

When advising on remuneration for privately owned business directors we factor in the following variables:

Board structure

Formal directorships attract higher fees.  Advisory board positions attract lower fees.

Size of entity

Typically the larger the entity (revenue and/or headcount) the higher the complexity and risk for a director and the higher the fees.

Industry or sector risk

The risks associated with the entity’s sector needs to be recognised. Is it more exposed to health and safety challenges (eg forestry), litigation risk (eg construction/engineering consulting/architecture) or solvency risk (eg early stage entities)?

Role

Chairing an organisation attracts a fee premium, particularly if the board consists of other independent members.  The rule of thumb is that Chairs receive 1.8x to 2x the fees of independent directors.  We believe this multiple is too high for privately owned businesses and are more comfortable around 1.5x.

Board Meeting Commitment

Monthly board meetings of three to four hours are the norm.  Longer board meetings may attract a fee premium; less frequent meetings, a fee discount.  Domestic travel required to attend meetings is also taken in to consideration.

Subcommittee participation

Requirement to be part of a sub committee will attract a fee premium.

Other Contribution

Any other requirements of the independent director outside the norm are also taken in to consideration.

__

The median fee paid to independent directors in New Zealand in 2019 was $46,000 per annum.[1]  This is often the starting point for calculating remuneration. However it should be noted this median is across the full spectrum of entities including NZX listed companies, SOEs, Not For Profits and SMEs.

Another reference point is to benchmark your independent director against the remuneration being paid on similar privately owned business boards. This information may be able to be  gleaned via other director vacancies including those listed on Appoint Better Boards.

Our 2020 board remuneration bands for small to mid sized privately owned businesses are:

Advisory Board Member $20,000pa to $35,000pa
Advisory Board Chair $30,000pa to $45,000pa
Independent Director $35,000pa to $55,000pa
Independent Chair $50,0000pa to $75,000pa

Where remuneration lies for your specific board member will depend on an analysis of the variables we shared above.

For the vast majority of board candidates remuneration isn’t the key determinant. That said, fees set outside current market rates typically fail to attract the highest calibre individuals.

 

[1] 2019 IoD Directors’ Fees Report