Breaking Down Boardroom Pay
Trends in Board Remuneration
Partner, Global Board / CEO Practice and Public Sector
Odgers Berndtson Asia Pacific
Future Directors Independent Advisor
Can board work provide a sustainable income? We work with a lot of directors who are actively seeking board roles. Some are looking to build a portfolio career as a board director. The work of a director can be interesting and worthwhile, and a director’s contribution to a board can be highly satisfying. Shouldn’t a fair remuneration also follow? Future Directors’ Aisling Blackmore spoke with Tom Mutch, Partner in Board and Public Sector Practices at Odgers Berndtson, to get his insights on how remuneration for non-executive directors has been shaped and changed in 2023/24.
Aisling Blackmore (AB): Have you noticed any significant trends in the remuneration being offered to non-executive directors through this year?
Dr Tom Mutch (TM): There are a couple of interesting trends. First is that there hasn’t been any significant uptick in remuneration across the sector as a whole. We have seen occasional increases in board fees - sometimes up to 10% - but this is limited to ASX 300 companies. The not-for-profit organisations that do offer remuneration have maintained compensation at a steady level. But many organisations, either due to financial constraints or preference, still rely on accomplished directors serving pro-bono.
Second is that there is a growing number of individuals seeking paid board positions, along with increased competition for board roles overall. Even with this increased interest though, for voluntary roles there can be challenges in presenting a candidate pool with good diversity of experience, as not everyone who is a skilled or high-potential director is in a position to volunteer. When we think about board work as a career, there’s a typical path where individuals start with pro-bono roles or in the not-for-profit sector and aim to convert into a paid position. It seems this is becoming harder for people to execute, and there’s sometimes a sense people have been “pigeonholed” as not-for-profit directors only.
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This not-for-profit to paid pathway might no longer be the right strategy.
AB: So if the roles and pay are holding steady for now, what does a typical compensation structure for non-executive directors look like? Is there much difference across sectors?
TM: Compensation structures vary across different sectors. In the private sector, companies have more flexibility and can offer various remuneration packages, including equity, even pre-listing. It can be hard to know what the trends are in this particular sector because it’s the least public.
For government boards, director remuneration has historically been modest. Rates are often regulated by a remuneration tribunal, with a flat fee and additional compensation for committee work. It’s a system that tries to ensure transparency. Rates can vary depending on the level of government, complexity of the government body being overseen, and whether the role is as a chair or ordinary member.
As I said earlier, listed entities are the only sector where there’s been a little bit of growth in director pay. Packages for directors on these boards may include shares or share options, but as always these directors still have a duty to maintain true independence.
Not-for-profit directors are typically fortunate to receive any compensation at all, and - in Australia at least - their fees are usually pegged to the government remuneration tribunal determinations.
AB: To pick up on your comment about listed entities: aside from director's fees, what additional benefits are commonly included as part of board remuneration?
TM: At its most basic, board remuneration is a sitting fee for attending board meetings. Depending on the sector and the business or organisation, there might be additional compensation for committee work, chairing, or other additional duties. Where businesses have shares, this can also form part of the director remuneration. The specifics vary significantly depending on the organisation and its policies.
AB: Given there is so much variation in remuneration, sometimes people ask us what tactics they can use to negotiate favourable remuneration packages for non-executive director roles. What do you think about negotiating a remuneration arrangement?
TM: Negotiating remuneration for non-executive director roles can be challenging because there are often limits set by the board charter. Candidates should inquire about the board fees and determine whether they are interested in the position based on that information. There are some remuneration models that use a set pool of funds that director fees are drawn from and individuals can increase their share of that pool through increasing their contributions. Remuneration under this kind of model is often determined at the end of the year based on performance, so proving your worth through active involvement with the organisation is crucial. However, if someone's primary focus is solely on the money, they may not be the right fit for any board.
AB: Are there key considerations non-executive directors keep in mind if they are offered shares as part of their remuneration package?
TM: Accepting shares as part of a remuneration package can create a tension between having "skin in the game" and maintaining independence. Directors need to balance shareholder interests alongside other stakeholder interests when making decisions in the best interests of the entity. It's up to each individual to consider what will help them maintain an independent mindset.
Some organisations offer a combination of sitting fees as the base remuneration for being a director, and then add performance shares, options, and the opportunity for capital events such as mergers, takeovers, or IPOs. Longer-term incentives, although less common, are becoming more prevalent in some ASX-listed companies and often involve longer vesting periods or restrictions on selling shares. These mechanisms try to move incentives away from a short-term success bias, and align directors' interests with the organisation's long-term success.
AB: There does seem to be an increase in conversations in the not-for-profit sector about needing to pay to attract certain kinds of expertise or levels of experience to board roles. What do you think - does pay equal quality in the realm of non-executive directors?
TM: Yes, compensation can attract quality directors. But it's essential to recognise that the true value of a good director exceeds what they get paid. Quality directors bring expertise that enables the organisation to successfully navigate or even avoid extremely challenging situations. Ultimately, providing director remuneration should be seen by organisations as an investment in serving shareholders and stakeholders effectively.
AB: We talked a little bit before about there being an equity issue in who can afford to take on voluntary roles. When it comes to who gets to be at the decision making table, are there other opportunities for improvement?
TM: Gender diversity initiatives continue to gain momentum and have been a focus of attention for some time. At a personal level, I take pride in my involvement in various initiatives, such as Chief Executive Women and Women on Boards, that aim to promote gender diversity and empower women in leadership positions. It's unfortunate that men are sometimes given opportunities more readily than women, who often have to work harder to achieve similar positions.
Ultimately in my role, I want to connect directors who can navigate modern challenges and contribute positively with an organisation that will value them and their experience.
AB: Tom, thank you so much for your time.
TM: Great speaking with you.
ABOUT DR TOM MUTCH:
Based in Melbourne, Tom specialises in cross-sector Board appointments, as well as handling senior and non-executive positions for the Federal and State Government.
He brings twenty years’ experience in executive search and has worked with a multitude of global and domestic clients across the private and public sectors. Prior to joining Odgers Berndtson, Tom was focused on Board, Government and Financial Services search in Melbourne, as well as spending ten years in Hong Kong as a headhunter covering Investment Banking and Funds Management.
Before executive search Tom spent ten years in academia, completing his PhD in Physics and Climate Change before working as a Post-Doctoral Research Associate and as Chief Scientist on a US-run university program in the Caribbean.
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