Measuring chairman fees

Tony Featherstone believes the chairmen of Australia’s largest listed companies may have a good argument for pay increases in the next few years, depending on company performance, of course.

Many listed company boards showed restraint with fee rises after the global financial crisis (GFC). With shareholders suffering heavy losses, it was hardly the time to push for aggressive rises, and board pay increased modestly or, in some cases, froze. But with the share market up almost 20 per cent over one year to April 2013, is it time for more substantial fee increases for non-executive chairmen and directors of ASX 200 companies?

Board pay is a sensitive issue. Shareholders who lost money will argue that boards are already well compensated, even overpaid, and that it is too soon for larger fees.

Critics will point to substantial rises in aggregate director fees during the 2002-2007 bull market, and that if boards are serious about better aligning pay to performance, surely a longer period of restraint is warranted. However, proponents of board fee increases will argue that many ASX 200 companies have come out of the GFC in excellent shape – in no small part because of their board efforts – and produced stellar shareholder returns.

Moreover, board workloads, responsibilities and risks have increased substantially since the GFC. That alone should justify modest aggregate board fee rises in 2013-14 and in some cases, double-digit increases for companies that have not lifted board fees for several years. Clearly, there are strong arguments for and against. The trouble is, so much of the debate focuses on absolute board fee increases and is simplistic and sensationalist.

Not surprisingly, a 15 per cent increase in the average fee paid to chairmen of ASX 100 listed companies in 2011 – according to Australian Council of Superannuation Investors (ACSI) research – attracted negative media headlines, even though ACSI noted the average was affected by chairmen appointments in some of the largest companies.

A more informed debate would focus on relativities: how non-executive director fees compare with chairman fees; how chairman fees compare with the CEO’s fixed salary; how Australian board fees compare with those in the US and UK; and how fees stack up against workloads.

Research by prominent remuneration consultant Egan Associates for Company Director compared non-executive chairmen and director fees in the ASX 10, 100 and next 100 listed companies between 2005 and 2012. The median fee for an ASX 100 company non-executive chairman was $405,818 in 2012, up from $251,193 in 2005. The median chairman fee in companies ranked 101 to 200 (by market capitalisation) was $193,338 last year, up from $104,933 in 2005.

A 62 per cent rise for ASX 100 chairmen over eight years would seem more than reasonable, especially given the 2008–2012 bear market.

Comparing fees with board workloads gives a different perspective. Egan’s data shows that in 2012, an ASX 100 company had a median 28 meetings (board and committees), virtually unchanged since 2005.

However, as Egan principal John Egan notes: "While there appears to be little movement in the frequency of meetings, our observation is that the time commitment in preparing for board meetings and the papers subject to review have become significantly more comprehensive over the past eight years. Meetings, particularly for committees, [are] often now half a day.

"Focus on remuneration, the two-strikes legislation, changes to termination provisions and the requirement for boards to directly engage a company’s remuneration advisers has meant an increased commitment for committee members, particularly committee chairmen, to ensure the stand taken by the board is fully informed and the remuneration report reflects the governance changes taking place.

"While we accept that the workload of chairmen in recent years has been significant due to market volatility, increased shareholder expectations and scrutiny of proxy advisers, we also observe that the load of other directors has been elevated significantly. As with the chairman, the change in workload arises from increased scrutiny and emphasis on oversight of the organisation’s risk appetite, extending well beyond financial matters to the environment, occupational health and safety and the international trading environment.

"In some organisations, it would not be inappropriate for a 50 per cent uplift in board fees, given they have not been adjusted for several years."

An emerging question is whether chairmen of the largest companies should receive a higher multiple of CEO fixed pay. In 2011, ACSI says the median fixed pay for ASX 100 CEOs was $1.91 million and the median chairman’s fee was almost $500,000.

Egan argues a highly experienced, active and effective chairman who spends two or three days a week on the role should earn closer to half the CEO’s fixed pay.

Those who believe CEOs are overpaid will argue their fixed pay is a poor benchmark for setting chairman pay. Perhaps so, but something is wrong when an ASX 100 CEO has fixed pay of almost four times the chairman’s fees.

If shareholders want chairmen to spend more time on the role and have fewer directorships, they should set fees accordingly. On that basis, chairmen of the largest listed companies, especially those who showed restraint after the GFC, have an argument for fee increases in the next few years, depending on company performance.