Non Executive Chairman Pay Increases On The Conservative Side

It is tough being a non-executive chairman. It is often a case of damned if you do and damned if you don’t, particularly when it comes to seeking board fee increases. On the one hand, directors are suffering from the increased workload expected of them under CLERP 9, ASX governance requirements, and investor expectations since high profile failures like HIH. On the other is the sensitivity we encounter with most non-executive chairmen who do not want to be seen as feathering their own nests with higher board fees. And to many chairmen, asking for more fees seems counter to their fiduciary duty as a director.

Added to this, in recent years many have relinquished generous retirement benefit arrangements, which may not have been fully compensated by an adjustment to fees.

Pay levels for ASX 300 chairmen are shown in the table below.

March Table 1

The increased workload has resulted in a proportion of non-executive directors giving up some board seats in order to focus on doing a good job on the remainder.

Yet, on the whole, board fees have still not made up for both the increase in workload and the reduction in retirement benefits. Relative to CEO pay, the increases in non-executive chairman pay have been conservative. The table below compares the increase in pay for CEOs and non-executive chairmen. (To read more on CEO pay see our December issue HERE)

March Chart 1

The graph compares total remuneration (TR) increases between the two roles, as well as the increase in total fixed remuneration (TFR) for CEOs. The data was sourced from GuerdonData™, our on line database, for all ASX 300 non-executive chairmen and CEOs who occupied their respective roles in the same company for two full years. TR is the addition of TFR and all cash and equity incentives. Typically, non-executive chairmen do not receive incentive payments, while half the TR of CEOs comprises incentive pay, so CEO TR can be more volatile from year to year. So we included the CEOs’ TFR in the comparison to chairmen TR, as all but 3 non-executive chairmen in the ASX 300 sample we used do not receive performance pay.

It can be seen that while TFR for the CEO increased by 16%, the median increase for non-executive chairmen lagged behind at 11%. While well ahead of inflation at 2.8% and average weekly earnings at 5.5%, it is still considerably less than the increases in fixed pay of the CEOs they employ to run the company.

This gap has been present in 4 of the past 5 years. Over time this is not a trend we at Guerdon Associates expect will continue.

The ratio of chairman to CEO pay has been fairly constant over most of the past two decades. The large increases in CEO pay relative to chairman pay since 2000 have started to upset this ratio, despite the expectation that, from a governance perspective, investors require chairmen to exert their authority over the CEO on board matters more frequently than in the past.

While we do not expect the trend to continue, it is a question still as to how it will reverse itself. Because of various factors, we expect the growth in CEO pay to continue above long term relative trends for a while yet. In addition, given the conservatism of most chairmen we encounter, there will be continued reluctance to seek shareholder approval for very large fee increases. But is it better to ask for increases every two years, which will still likely be above AWE growth, or a one off relatively large adjustment? While company performances are generally better than average, and with most large investors cognisant of the need to attract and retain quality chairmen and directors, now may be the right time for a large one-off adjustment.

We will provide more board trend data in coming newsletter issues.

© Guerdon Associates 2024
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