You get what you pay for

Terry McGuirk reveals the results of a new survey into the fees paid to directors from all sorts of entities.

One of the keys to improving the quality of boards, board committees and the standard of corporate governance is to ensure that directors are remunerated as competitively as possible. Yet until recently, the challenge for progressive boards has been the dearth of information about how much directors of unlisted public, private and not-for-profit (NFP) directors are paid.

This scarcity of data about remuneration of directors of non-listed companies is, of course, in stark contrast to the readily available and much scrutinised details about how much listed companies pay their directors.

The 2014 Australian Board Remuneration Survey Report, published by McGuirk Management Consultants in collaboration with the Australian Institute of Company Directors, is helping to break down many of the unknowns about how non-listed boards remunerate their directors.

I urge boards to give close attention to the survey’s findings, particularly given that the prime beneficiaries of more competitive director remuneration will be the companies themselves and their shareholders.

In response to the shortage of remuneration data, Company Directors encouraged members to contribute to the survey. The latest, much-expanded survey covers 923 boards — 52 per cent more than in last year’s report.

This data has been primarily collected from 622 of Company Directors’ members and 240 clients of McGuirk Management Consultants.

I believe the survey provides the most comprehensive insight available into the remuneration of non-listed directors. The latest survey includes the boards of 222 private companies, 181 unlisted public companies and 251 NFPs plus government entities, superannuation funds and listed companies.

Significantly, the survey data was collected and published in the same year, providing real-time data to assist boards in setting their director remuneration for the coming 12 months.

Key findings in the 2014 survey include:

• Of the directors of unlisted public companies and private companies that received an increase, the median rise was four per cent in 2013/14, the same as the previous year’s rise.
• Of the NFP directors that received a rise, the median gain was five per cent in 2013/14, again the same as the previous year.
• Of the listed company directors receiving a pay hike, the median rise was eight per cent in 2013/14 (up 10 per cent on the year before).
• 31 per cent of boards surveyed increased director remuneration in 2013/14 — down from 40 per cent in the previous year.

The depth of the survey is reflected in the range of the annual revenues of surveyed companies. Their revenues range from: under $1 million to over $25 billion for listed public companies; under $300,000 to over $2 billion for unlisted public companies; under $100,000 to over $2 billion for private companies; under $150,000 to over $900 million for NFPs; under $500,000 to over $12 billion for government boards; and under $500,000 to over $68 million for superannuation boards.

Bigger entities pay more

It is hardly surprising that bigger entities typically pay higher director fees — no matter whether a company is listed, unlisted public, private or NFP. However, what may surprise is the extent of the differences.

For instance, the “combined” figures — amalgamating the findings for different types of boards — show that directors of entities with $1 million to $5 million in revenue received average remuneration of $25,143 in 2013/14.

This contrasts with: $20 million to $40 million in revenue, average director fee, $35,355; $40 milion to $80 million in revenue, average director fee, $42,463; $240 million to $400 million in revenue, average director fee, $70,386; and $4 billion-plus in revenue, average director fee, $129,465.

Different boards pay differently

On average, directors of listed companies are paid substantially more than other directors of other types of boards. The 2013/14 figures are: listed companies, average director fee $83,404; unlisted public companies, average director fee $34,506; private companies, average director fee $45,266; NFPs, average director fee $18,827; government organisations, average director fee $39,671; and superannuation companies, average director fee, $35,561. As later discussed, many NFPs don’t pay their directors.

There are, of course, various explanations for the gap between director remuneration of Australian Securities Exchange (ASX) and non-ASX boards. And, it is understandable to question whether such a differential is justified.

At the end of the day, the challenge of running a $20 million business is the challenge of running a $20 million business, whether listed or unlisted.

My opinion is that over time, the complexity of a business is increasingly being recognised when setting director remuneration, no matter the type of entity.

Again over time, I expect that the director remuneration paid by unlisted public companies and private companies will move close to the listed company levels, albeit slowly.

Keep in mind that directors of listed companies received double the median pay rise of unlisted public and private companies in 2013/14.

Why NFPs should pay directors

As our report shows, the vast majority of non-for-profits don’t pay their directors. But my view is that reasonably-sized NFPs are likely to gain better performance from their directors by paying their boards.

A decision by a NFP to pay or not pay its board can become a governance issue because of the potential impact on director performance. While they are NFPs, they are definitely not for losses.

In order to attract directors with suitable skills, qualifications and experience, NFPs should remunerate them.

Why committee members should be paid

Another area involving decisions about whether or not to pay involves board committee work. Thirty seven per cent of boards participating in the survey pay directors additional fees for their committee roles. Listed companies are more likely to pay for committee work.

With good reason, the practice of paying for board committee work is increasing. More companies are recognising the variable workloads of directors in regard to committees — some directors sit on more committees than other directors and some committees meet more frequently.

I strongly believe that all boards should pay  their directors for committee work. By paying, boards can make greater use of their directors’ particular skills.

Whether to pay for committee work is also a governance issue. Boards that don’t pay extra for committee work will tend to try to share the workload equally among directors rather than ensuring that the most suited directors serve on particular committees.

By paying for committee work, a board may decide, for instance, to have one director serving on two committees while another director may not be on any committees. A director with a heavier workload should be paid accordingly.

As a rule-of-thumb, committee chairmen are usually paid twice as much as the members of a committee — no matter the type of organisation or industry involved. For instance, the chairmen of audit committees were paid an average of $15,213 in 2013/14 whereas members of the same committee were paid an average of $8,478.

It is worth emphasising that it is in a company’s best interests to know how much their corporate counterparts are paying their directors — including for committee work.

With this knowledge, boards are in a better position to attract quality directors and then to make the most use of their skills.

As a Company Directors member, you are able to request two complete extracts from the remuneration report.