18/08/2008 11:32

UK non-executive directors reach balance between pay and accountability

Non-executive directors (NEDs) of companies of all sizes received lower pay rises (15.6%) last year than in previous years as fees become increasingly aligned with the scope and responsibilities of the role, according to the PricewaterhouseCoopers LLP annual guide Non-Executive Director Practice and Fees.

Formal review of corporate governance and board effectiveness is becoming increasingly prevalent in UK companies, with 84% of respondents conducting annual performance reviews of their board. In addition, the average director’s time commitment has risen from 15 days in 2003 and 20 days in 2007 to 21 days in 2008.

Sean O’Hare, partner at PricewaterhouseCoopers LLP, commented:

“The rate of fee increases is levelling off as non-executive directors and the boards that employ them are working harder to balance fees with the responsibilities that come with the role. We’re seeing much more emphasis on reviewing fee structures and levels – over half of the companies we surveyed had carried out a review during the last 12 months. Historically, non-executive directors’ fees were reviewed every three years so this increasing frequency signals a significant shift.

“The type and size of organisation and the number of service days all have an impact on the fee levels, together with the specific responsibilities of non-executive directors, which in part explains the wide range of fees now paid to the Chairman.”

The report is compiled by PricewaterhouseCoopers LLP pay survey unit Monks to help remuneration committees review their NED terms and conditions. It provides a guide to the composition and practice of main boards and committees in UK companies and the service commitments, fees, facilities and benefits of non-executive directors (NEDs).

The main findings of the 2008 Non-Executive Director Practice and Fees report are:

Fee levels – fee levels continue to be influenced by both company size and time spent doing the job. The increase in fees for directors and chairmen is less pronounced than in previous years (an increase of 15.6% for directors and 25.0% for chairmen in 2008). This suggests that the trend of large fee increases to non-executives as a result of a perceived increase in responsibility is slowing. .

Terms of appointment – there has been little change to policy regarding non-executive director appointments since last year. Most (78%) NEDs are appointed for an initial three-year term. Although the Combined Code states that all directors should be subject to re-election at intervals of no more than three years, the survey findings indicate that 31% of companies have no set limit on the length of time that a non-executive director may serve. Where there is a limit in place, only 30% of companies consider that this is usually enforced.

Board structure – the Combined Code states that the board should include a balance of executive and non-executive directors (including independent non-executives). Analysis of the percentage of non-executives on the main board indicates that a 50/50 ratio of executive/non-executive is the median practice, although larger companies have a higher proportion of non-executives to executive directors (60/40 ratio).

Board effectiveness – 84% of all industrial and service industry participants stated that they currently review board, committee and individual directors’ performance with similar figures reported in financial organisations (83%). As with inductions, there is a marked difference in practice between small and large companies, particularly in conducting an annual performance review of board committees - 91% in companies over £500m revenues compared to 63% in companies under £500m.

Outside appointments – his year the survey showed a difference of market practice between smaller and larger organisations. In companies with revenues up to £500m, over half (51%) the companies have no executives serving on another companies’ board and are less likely to encourage executives to accept a non-executive appointment. Almost two thirds (62%) of companies with revenues over £500m have executives serving on other companies’ boards. The percentage was 52% and 59% in 2007.

Payment of non-executive directors in shares - although the Combined Code explicitly prohibits the award of share options to non-executives (Combined Code Provision B.1.3), a small number of companies do provide part or full payment of non-executive director fees in the form of shares. Payment of non-executives in shares is still a minority practice, with only 3% in industrial and service and financial companies doing this.

Sean O’Hare, partner at PricewaterhouseCoopers LLP, commented:

“As fee increases become more moderate we can expect more focus by institutional shareholders on the disclosure of the NEDs’ effectiveness rather than merely what they earn. To date, such disclosure has been more to confirm companies are compliant with the Code rather to indicate the quality of the review and key action points – we expect to see this change over the next few years.”

1. Press copies of Non-Executive Director Practice and Fees are available on request. Please contact Monks for details on 020 7212 4115 or email: info@monkspwc.co.uk.

2. The study provides a guide to the composition and practice of main boards and committees in UK companies and the service commitments, fees, facilities and benefits of non-executive directors. Of the 155 companies which provided information, 31 are in the FTSE 100 and 37 are in the FTSE 250. Analysis is also provided from the most recently available annual reports of around 1,500 quoted groups with year-ends from September 2006 to February 2008

3. Throughout the report reference is made to The Combined Code on Corporate Governance - a set of principles of good corporate governance and provides a code of best practice aimed at companies listed on the London Stock Exchange. It is overseen by the Financial Reporting Council and its importance derives from the Financial Services Authority's Listing Rules. A full copy of the Combined Code is available from http://www.frc.org.uk

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