By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Non-executive directors (NEDs) at large UK companies are frustrated about their pay but fear negative publicity if they ask for more money, according to experts.
The basic director pay for NEDs at the UK's largest 150 listed companies reached £72,052 this year, up from £70,785 in 2021, according to new data from recruitment firm Spencer Stuart.
NEDs give independent oversight of a company’s management. Over the past decade, pay has increased a couple of per cent a year but workloads have increased by more, according to Tessa Bamford, head of Spencer Stuart's board practice.
“The remuneration non-executive directors get is not commensurate with the responsibility that they take on and the time that they devote to the role,” says Bamford.
Spencer Stuart's data goes back to 2014 when the basic NED fee was £62,000.
It is difficult for NEDs to argue for more because of the criticism that high executive pay has received, Bamford says.
Ocado and Informa are among companies that have made headlines recently due to shareholder dissatisfaction over executive pay. Some 77 per cent of investors believe chief executive pay is too high, according to a 2021 academic paper.
Since the global financial crisis, non-executive directors have been aware of such criticisms, says Kit Bingham, partner in Heidrick & Struggles’ London office and head of the UK board practice at the recruitment firm.
NEDs should be earning an extra £20,000 to £30,000 a year based on the amount of work they do, Bingham says. But that is not enough to offset potential criticism of big pay rises, he says.
NEDs’ responsibilities have been growing since the Cadbury report, which was published in 1992 in response to several corporate failures. It recommended greater independence on boards and audit committees, says Bingham. The resulting voluntary code was a forerunner to the UK corporate governance code.
Those responsibilities have since expanded to include internal controls, remuneration, cyber risk and workforce engagement, he says.
Sixty percent of non-executive directors reported demands on them had increased over the past year, according to a survey from remuneration consultancy MM&K. Some 56 per cent felt their pay was adequate.
Some respondents were concerned pay had not risen in line with the demands of their role, says MM&K head of analysis Margarita Skripina.
Future audit and corporate governance reforms could present an opportunity to argue for more pay, says Roger Barker, director of policy and corporate governance at the Institute of Directors.
NEDs are likely to face greater personal liability and time commitments following the creation of a new regulator, the Auditing, Reporting and Governance Authority, Barker says. The new regulator is expected to be operating in 2023.
That could help them justify a bigger pay rise.
Some non-executives are seeking better pay at private equity-backed firms, recruiters say.
"People can make a lot more money and stay out of the spotlight in private equity," says Bingham.
Bamford has noted an increasing number of people who are not interested in joining listed company boards.
That is partly because private equity-backed companies face less scrutiny than listed companies and often pay generously, and the prospect of increasing rules and scrutiny involved in listed companies.
"The agenda is all about governance and not about the interesting things about helping companies, the strategy," says Bamford.
UK NED pay is less competitive than the US, where directors earn about $150,000 in pay with that amount matched in equity, she says.
UK companies are reluctant to give share-based rewards to non-executive directors due to their interpretation of the corporate governance code, says Barker.
The code says non-executive pay “should not include share options or other performance-related elements”.
The UK government wants to make it easier for non-executive directors to be paid partly in shares. The Investment Association, the industry body representing UK asset managers, says it supports NEDs being paid partly in shares but not if incentive awards are geared towards the share price or corporate performance as this risks undermining their independence.
Minerva chief executive Sarah Wilson says performance-related pay would be inappropriate because the role of NEDs is to hold management accountable, not to push up the share price.
A spokesperson from the Department of Business, Energy and Industrial Strategy said paying NEDs in shares “could ensure they are fully invested in the success of the company they run”.
But critics of increased pay point out that there is no shortage of applicants for NED roles under the current rules.
“There are lots of people with expertise relevant to large and complex organisations from outside the corporate sector who would probably jump at the chance to earn the equivalent of a very good full time salary for just a few days work a month, says Luke Hilyard, director at the High Pay Centre.
Bamford and Bingham both say plenty of people are still interested in becoming non-executive directors despite concerns about pay.
They do not join boards to become rich, says Bamford. “You join a board because you're interested in business, you want to help management, you want to help the business and you want to continue to be useful and learn and give something back.”
Non-executive directors get paid more than many full-time professionals in healthcare, public service, the army payor humanitarian charities, despite working a few days a month on average, Hilyard says.
Businesses and business groups can also provide training in non-executive roles, he adds.
This article is based on a piece written by Amanda Gerut for Agenda.
