First things first, the notion of NED roles as a 'path to riches is generally unfounded for most. Few NEDs, if any, pull in salaries that come close to the average earnings of the lowest-paid senior executives and Big 4 partners.
A 2020 report by Guerdon Associates also sheds light on the financial landscape for NEDs. For NEDs on boards of ASX companies, the figures vary significantly. On average, non-Chairpersons earned approximately $510,000 for ASX 100 companies, $210,000 for ASX 200 firms, and for smaller ASX entities, it hovered at less than $100,000.
Moreover, they reported that only a minuscule fraction—15 ASX independent directors, representing a mere 0.5% of all ASX directors—earned over $1 million. Remarkably, just one of those high earners was female. Fast forward to 2023 and governance firm, Ownership Matters in its report (Board composition director pay and skin in the game), found exactly the same statistic. So, if you're expecting your NED income to replicate your executive earnings, think again; the odds of that happening are slim.
The 2022 Australian Board Remuneration Survey by McGuirk Management Consultants, featuring data from 1,128 Australian boards from small to larger companies, indicated that the median annual remuneration for ASX200 Chairs was $355,118, for deputy-chairs $179,930 while NEDs received a median of $159,000. NEDs of private companies took home between $45,000 - $65,000 while NEDs and Chairs of Not-for-Profit (NFP) organisations, if paid at all, received an average of $40,000 and $20,000, respectively.
Choosing a NED role isn't a surefire ticket to wealth. If financial gain is your primary motivation, you might want to consider making it a portfolio of activities.
But what constitutes the right approach to NED remuneration? The ASX and the AICD, among other organisations, offer guidance on the principles governing the compensation of Independent NEDs and Chairs. While these principles provide valuable insights, they aren't binding rules dictating the precise figures or the composition of remuneration. Instead, they offer a framework for fair practices, along with disclosure requirements and the shareholders' ability to reject recommendations in the case of listed companies.
One significant guideline pertains to equity-based remuneration. It's generally acceptable for non-executive directors to receive shares as part of their remuneration to align their interests with other security holders. However, options with performance hurdles or performance rights may not be suitable, as they could introduce bias and compromise objectivity.
ASX Corporate Governance Principles and Recommendations
So, what's the right level of pay? One of ASX's guiding principles is that NED remuneration should reflect the time commitment and responsibilities of the role. This mirrors the same principles used to determine executive and employee compensation within organisations. Crafting a compensation strategy involves considering various factors, such as benchmarks, competition, candidate supply, affordability, role attractiveness, relative position within the organisation, individual risk, and more.
To put it into perspective, let's calculate the potential remuneration for a NED based on hourly earnings. Assuming an hourly rate of around $190 (50 hours per week over a standard year, excluding holidays) for a lower-level Big 4 partner, a NED in a medium-sized organisation might work approximately 225 hours per year. Using this rate, the annual remuneration would amount to around $40,000. And then, all the other factors listed above can be considered, including shares or other forms of incentives.
Ultimately, NEDs should be compensated, even in Not-for-Profit (NfP) and charity boards. Time is a valuable commodity, and free service is seldom valued. Moreover, as the average CEO's tenure in ASX 100 companies lasts only 4-5 years, while board members' average tenure extends to 5-10 years, the board's oversight plays a pivotal role in ensuring the organisation’s long-term health, both in terms of its role and its continuity.
WOB advises its members to do their own research (e.g. talk to Board members, head hunters, CEOs, conduct informational interviews, talk with other WOB members, read all available Board remuneration data online, peruse posted ads for Board roles, etc) to understand current NED remuneration trends. Many factors apply to the way individual companies set their board remuneration, and there is clearly no one-size fits all.