Non-Executive Director Remuneration Update

Our analysis this year includes the relationship between non-executive director pay and chairman pay.  However, for the first time in the newsletters, we publish research on the relationship between director pay and workload. 

We extracted data for all non-executive director positions from GuerdonData®.  This data comes from Australian ASX 300 companies and is based on 2006 disclosures.  We also extracted company financial data from Aspect Huntley as at 12 February 2007.

We focused our analysis on individuals who are deemed to be independent, to minimise any peripheral effects on remuneration. For example, we found a high proportion of non-independent directors receiving remuneration that varied considerably from market normative standards, and that most had high levels of personal shareholdings in the company.  We also excluded companies whose market capitalisation was less than $30 million, dual listed companies and directors based off shore.  We were left with 747 individuals.

Pay Levels

Table 1 summarises the remuneration for all of the non-executive directors in the sample.
0407-3 Director Rem Summary
NED Pay Relationship to Company Size

We expected to see a relationship between market capitalisation and total compensation.  Our analysis confirmed that market capitalisation explains 54% of the variation in total compensation.

We ranked the director sample based on market capitalisation and then divided it into four groups.  The following graph illustrates the variation in total compensation as market capitalisation increases.  The blue bars represent the inter-quartile range (25th percentile to the 75th percentile, or middle half) of total compensation data and the yellow dash is the median (or 50th percentile).
0407-4 Comp and Mkt Cap
Larger companies are also more likely to provide post employment benefits (superannuation) and share based payments.  Of the group containing the largest companies, 81% provided superannuation benefits and 29% provided share-based payments.  This compares with 78% and 16%, respectively, for the remainder of the sample.

NED Pay Relationship to Chairman Pay

Total compensation for directors is consistently around half of that of the chairman.  This decreases to around 40% for the largest group of companies.  Table 2 shows the comparison between median total compensation for directors and chairmen.
0407-5 Chair and Director Pay
NED Pay and Workload

We examined the relationship between pay and workload.  The most reliable measure of workload that we have is the total number of meetings held and attended.  This includes both board and committee meetings.  Table 3 summarises the total number of meetings held and attended for the sample as a whole.
0407-6 Meetings Held and Attended
The smallest number of meetings held was seven at  There were four companies who expected at least some of their directors to attend 100 meetings or more.  These were Transurban Group, James Hardie, Lion Nathan and National Australia Bank(NAB).  For the first three companies the number of meetings relate to factors other than company size.  Both Transurban and Lion Nathan have been acquiring other businesses and the James Hardie board has had significant difficulties resolving compensation arrangements arising from asbestos related diseases.  NAB directors sit on subsidiary boards and attend up to 41 additional meetings as directors of those boards.

Our analysis showed that the total number of meetings held explained 15% of the variation in total compensation.  Figure 2 plots total compensation by the total number of meetings held.  While there is an upward trend in total compensation as the number of meetings increases, there is a significant amount of variation that cannot be explained in terms of workload.
0407-7 Comp and Meetings Attended
There is a weak relationship between the number of meetings and the size of the company.  Figure 3 shows the increase in meetings held as market capitalisation increases.  The trend becomes apparent for companies with very large market capitalisation.
0407-8 Meetings and MKt Cap Increases

In conclusion there is little evidence to support the contention that board NED remuneration is a function of how hard NEDs work. 

Is this fair and equitable?  We know that companies operating across countries may subject directors to a greater number of different compliance and fiduciary requirements than domestic companies (and frequently more travel).  Both within and outside Australia a non-wholly owned subsidiary requires great care and attention by the main board chairman and directors who may sit on its board to exercise a duty of care for all shareholders.  Within Australia APRA regulated companies are subject to onerous additional requirements in addition to ASIC regulations. Main board director or chairman attendance at their own company’s superannuation fund as a trustee is subject to another set of regulatory and fiduciary requirements.  Some industries, such as gaming and wagering, impose additional loads on directors that vary across state and national borders.  Acquisitive companies, or companies subject to hostile takeovers, sometimes impose extreme workloads on chairmen and other directors where there is much shareholder value at stake.  Clearly there may be an argument that director pay is subject to a consideration of factors (including workload) other than company size. 

Fortunately, none of the major governance groups or institutions have guidelines that preclude consideration of these factors in setting director pay.  This opens up a range of possibilities for how a board can establish pay guidelines that are fair and reasonable, yet can vary chairman and director remuneration taking into account factors such as workload and complexity, as well as size.

© Guerdon Associates 2024
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