Non-executive director salary guide
One of the most frequently asked questions by those considering embarking on a non-executive career is ‘Do non-executive directors receive remuneration?’.
The answer is a little more straightforward than simply yes or no, with many factors influencing whether NED positions are remunerated or not and if they are, to what extent. How experienced the non-executive is, the size and structure of the company, the sector or industry in which it sits, the time-commitment required and even location can all affect the level of remuneration.
In this blog, we’ll examine how these factors influence pay, levels of remuneration that can be expected against these variables, and how guidance from professional bodies and fiscal regulations can have a bearing on non-executive pay.
Exploring the Position of a Non-Executive Director
A non-executive director (NED) serves as a board member of a company but is not a part of its executive management team. The role excludes involvement in the company's day-to-day operations, focusing instead on providing independent oversight and offering strategic advice and input to the executive team.
Typically, non-executive directors are appointed to safeguard shareholders' interests and introduce an independent, constructively critical perspective to the board. Furthermore, they hold a pivotal function in matters of governance, risk management, and financial supervision, contributing significantly to the company's sustained prosperity.
How and when do NEDs get paid?
Most professionals’ first non-executive role is likely to be unremunerated, which is often termed a pro bono role in the context of board level appointments. Role specific experience is a highly-valued quality in non-executives and resultantly, the vast majority of first time NEDs accept the trade-off of giving their time and professional expertise for free, in order to build the track record and reputation required to gain remunerated board roles further down the line.
Many first-time NEDs will find positions with third sector or public organisations who provide an opportunity for immersion in many aspects of the role but may lack the budget for remuneration beyond expenses. Exceptions to this include those who have held board advisory or fractional roles prior to applying for NED roles; these professionals possess knowledge of working at board level and may be able to negotiate for remuneration in their first NED role.
As NEDs build up a portfolio of roles their ability to command higher remuneration will increase, with the highest earners being those who work with large corporates or listed companies - but even for those working with SMEs, experience can be handsomely rewarded.
The startup sector is a slightly different proposition, with many businesses offering equity (or a blend of equity plus cash) which means that while remuneration may not be immediate, the potential to receive a healthy return further down the line is a very real possibility.
It is worth noting that since the IR35 tax reform legislation came into force, NEDs are subject to PAYE and NI, as they are classified as ‘office holders’. However, should non-executives provide consultancy services to a company for which they are also an NED, this portion of income will not be subject to the same deductions, provided that the two are tendered on separate contracts.
The table below outlines how the main factors at play can affect NED salaries:
How much do NEDs get paid?
As previously touched upon, non-executive director remuneration can vary widely depending on a number of factors However, some general ranges for NED annual pay in the UK can be provided as follows:
- Small to medium-sized companies: £20,000 to £50,000
- Large public companies: £50,000 to £150,000
- Non-profit organisations: NEDs of non-profit organisations typically receive a lower salary than those of for-profit companies. They may receive a token fee or no fee at all.
- FTSE 100: a NED base salary can be anything from £100,000 – £300,000
- Chairs: Non-executive Chairs hold a different role to CEOs or Executive Chairs, and operate independently of the company. In some large companies, a chairman may receive an annual fee of £150,000 to £300,000.
It is common for NEDs to be paid an additional fee for serving on committees of the board, such as audit or remuneration committees, which can typically see annual pay of between £5,000 and £10,000.
Geography can have a big impact on NED salaries with London and the South East typically commanding an average of around £45,000 while in Northern Ireland, the average pay is less than half of that. Similarly, NED pay in the US is, on average, around the £100,000 mark while non-execs in Sweden, Denmark and Norway can expect on average £55,000.
The principle of remuneration
The UK Corporate Governance advises that non-executive pay “should not include share options or other performance-related elements” which is at variance with the US where the majority of non-executives see their cash remuneration matched in share options. As a result most established UK companies do not offer incentive based remuneration to NEDs though, as mentioned previously, share schemes can be useful for organisations with limited financial resources, such as early-stage startups.
Companies who remunerate their non-executives fairly often reap the rewards of stability, with NEDs more likely to stay on board for their full term rather than seeking pastures new. As NEDs steer on long-term strategy and company-wide governance, having continuity and longevity within a non-executive team can have huge benefits in terms of board performance and company success.
In recent years, the importance of transparency around all board-level pay - both executive and non-executive - has been highlighted as a fundamental aspect of good governance. With multiple stakeholders to satisfy, boards must be able to justify non-executive remuneration in order to dispel notions of conflict of interest, impropriety or wastefulness.
The non-executive board determines their own remuneration (frequently inline with benchmarks set by external consultants); this is highly atypical, especially in the context that NEDs are obliged to act in the best interests of long-term shareholders. In order to build trust with shareholders, non-executive boards should use annual statements and shareholder communications to provide detailed and transparent information about remuneration processes, including pay reviews.
Shareholders should be provided with a thorough presentation of both the underlying principles guiding non-executive director compensation plans and the actual compensation granted through these plans. As shareholders ultimately have the final say on the Articles of Association which govern non-executive pay, transparency is crucial to having a functioning remuneration policy.
NED salary guidance & regulations
Since the Cadbury Report (1992) recommended that there should be a majority of non-executives on the remuneration committee, and that non-executives should be selected by the whole board, there has been a raft of guidance and regulations released around board level remuneration.
It is worth noting that much of this applies to listed or large companies but, as with many corporate policies, small and startup businesses can take valuable lessons from larger companies when looking to build out remuneration and broader governance. For those looking to work with startups as non-executives, putting a robust governance framework in place can prove invaluable and will reap rewards as the company grows.
The benchmark guidance for non-executive remuneration in the UK is provided by the UK Corporate Governance Code, which outlines a number of key recommendations:
- Independence: Non-executive directors should be independent of the company and free from any relationships or circumstances that could affect their judgement. Their remuneration should not compromise their independence.
- Clarity and Transparency: The code emphasises the need for clear disclosure and transparency regarding the remuneration of non-executive directors. Shareholders should be provided with a clear understanding of the non-executive director's remuneration structure and the principles guiding it.
- Review and Approval: Non-executive director remuneration should be determined by the board's remuneration committee, which should be composed of independent directors. Shareholder approval may also be sought for the remuneration policy.
- Alignment with Company Performance: Non-executive director remuneration should be aligned with company performance, and their fees should reflect the responsibilities and time commitment required.
- Periodic Review: The code recommends regular review of non-executive director remuneration policies to ensure they remain effective and appropriate.
- Avoiding Excessive Remuneration: Non-executive director remuneration should be reasonable and avoid excessive fees that could be perceived as out of proportion to their role and contributions.
- Clawback Provisions: The code suggests the inclusion of clawback provisions in the event of misstatement of company performance or other exceptional circumstances.
- Shareholding Requirements: Some companies may require non-executive directors to hold a minimum number of shares in the company to align their interests with those of shareholders.
While these are in no way exhaustive, they do provide the basic ground rules that companies and non-executives should adhere to when approaching board remuneration.
The question of how much non-executive directors get paid is a complex issue with a huge number of factors at play. However, evidence shows that by forging a long, varied and active portfolio career which includes a number of non-executive roles, very significant remuneration can be achieved by NEDs in the UK.
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