Setting Non Executive Director Remuneration - an ITNEA survey
This appendix is focused on non-executive directors who are not full time employees elsewhere. Arrangements for those in full time executive roles elsewhere are often made on a company to company basis where other considerations may apply. Otherwise the notes below set a relevant framework for assessing non-executive remuneration.
For practical purposes the non-executive should not load him/herself to 100%, otherwise there is insufficient capacity to deal with peaks of activity and provide flexible access across multiple roles. Given that the non-executives take holidays, sickness and much self development in their own time, a practical total of nominal commitments is about 12 days per month (i.e. six directorships or their equivalents at a nominal 24 days per annum per company). This then becomes an effective full time load. To determine equivalent reward/cost levels the following should be considered:
* items funded by non-execs out of fees
The previously published ITNEA survey on Non-Executive Remuneration shows that on average non-executive directors were paid at a rate of just under £1000 per day, which even adjusting to current rates clearly does not compare with the executive costs/rewards listed above. The broad feeling is that while the IT sector non-executive fee rates are comparable with non-exec rates in some other industries, they are very low in comparison with total executive remuneration (excluding share schemes) in their IT companies. At the same time there was also a view that the total package (including share schemes) compared very badly, as there were almost never long term performance related rewards for the non-executives.
Fees are of course a matter of individual negotiation between directors and their companies, but we do feel that a fresh look at fee levels is needed if Chairmen ask directors to take a committed and professional approach to the job, as described in the main paper.
Longer term performance related rewards
In looking at the reward mechanisms, short term or profit related bonuses and benefits in kind are clearly inappropriate for non-executives, because of corporate governance issues and the long term nature of their role. While some people feel longer term schemes such as share options do not align non-executive interests with shareholders, the majority of non-executives in the IT sector feel that such rewards should be part of the package and that they do align interests with the shareholders. They do feel that their current fee-based rewards are low for the level of responsibility and contribution to success that they make and that both a revision of fee levels and shares or options could help bridge the gap.
The surveyed IT non-executives were happy to share the risk for appropriate levels of reward, and for part of an improved package to be related to real performance, as would be the case with share or option based rewards. This is often achieved in unlisted companies. We feel that some adjustment to option rules and better communication would address the concerns of bodies like the AIB. For example, guidelines for non-executive share options could specify that:
It should be stressed that the main incentive is to increase shareholder value over the long term. While the levels suggested are small in overall dilution terms, they significantly address existing non-executive concerns as to their poor reward for helping companies to succeed.
While the above references NEDs, a similar logic applies to the remuneration of Chairmen,. Apart from the chairman's role inevitably involving more days per month than NEDs on the same board, most chairman are rewarded at a higher rate than the NEDs on that board.
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