Non-Executive Director compensation – a balancing act

In general, Directors have three main roles – viz- monitor Management on behalf of Shareholders; provide Strategic Direction and Policy Support; acquire resource for the company. These roles presuppose that through the expertise, wisdom, experience and information available to individual Directors, the Board will provide the required direction to the enterprise and would identify and acquire tangible as well as intangible resources required for sustainable performance. The monitoring role includes protecting and assuring the integrity of internal controls; the audit function; appraising and measuring management performance etc.

Today Directors are clearly spending more time on their Board roles with full Board meetings, Committee meetings, teleconferences, and Director Development programmes among other commitments. With more stringent corporate governance expectations, reputational risk is included to an already time-consuming job.  Given the vital importance of the responsibilities assigned to Non-Executive Directors, it is expected that they will devote significant time and effort to their boardroom duties. Non-Executive Directors are expected to bring an independent perspective and oversight to the corporation on whose Board they sit.

Boards are expected to have Non-Executive Director compensation policies that seek to attract and retain highly qualified Directors; align Directors’ interests with those of the long-term owners of the corporation; provide complete disclosure to shareholders regarding all components of Director Compensation and seek to provide for long-term stewardship of the corporation. (International Corporate Governance Network).

Although Non-Executive Director compensation is generally immaterial to a company’s bottom line and insignificant when compared to executive pay, it is an important aspect of a company’s governance. Since Director pay is set by the Board and has inherent conflicts of interest, care must be taken to ensure that there is no appearance of impropriety. In setting Director Pay, the Board should take cognizance of the following: 

Peer groups – As Directors are recruited from many industries, the Board should consider competitive data both pertaining to the industry in which the company is operating and across a broader group of size-appropriate companies. In addition, it is important to assess total Director Compensation, and not pay by component since companies tend not to offer all components to Directors. 

Workload – It is nearly impossible to determine the actual number of hours a Director will put into the role.  While number of meetings is an imperfect way to determine workload, and more importantly, to determine the value that a Director will bring to the Board, it nevertheless is useful information when benchmarking pay packages. 

The merit and timing of pay increases – Boards generally feel a bit awkward about approving an increase in their compensation. However, it is suggested that an increase may be justified if the Company is doing well and where a peer review suggests that the company’s Directors’ pay lags the market. (http://www.farient.com/2010/12/directors-compensation)

Section 267 of the Companies and Allied Matters provides that a company is not bound to pay remuneration to Directors but where the company agrees to pay, Directors shall be paid such remuneration out of the funds of the company and such remuneration shall from time to time be determined by the company in general meeting. The CBN Code of Corporate Governance provides that Director Remuneration shall align with the long-term interest of the Bank and its shareholders and the levels of remuneration shall be disclosed to the shareholders in the Annual Report.  The Code limits Non-Executive Director Compensation to Sitting Allowance, Directors’ Fees and reimbursable travel allowance. 

  Increased demands coupled with the unique requirements of each Board means that Non-Executive Director pay should be fair, but not enough to tilt the balance of independence required of an effective Board. Section 14.6 of the SEC Code of Corporate Governance provides that compensation for Non – Executive Directors should not be at a level that could compromise their independence. Just as executive compensation is heavily scrutinized today, so is board compensation.  The Board should continue to strive to strike the right balance and ensure that appropriate disclosures are made in the interest of transparency and accountability.

Adebisi Adeyemi