Director fee increases are accelerating, particularly among New Zealand’s larger businesses. But, they still lag well behind what is paid to directors in other countries, including our nearest neighbour Australia.
Culture and economics probably play part in our lower level of director remuneration, just as the shift towards more involvement in the Australian economy is driving the increase in fees, according to Sheffield’s remuneration practice manager and driver of the consultancy’s director survey initiative, Sherry Maier.
New Zealand director fees in companies with turnovers of between $700 million and $1 billion have increased around 70 percent over the past three years according to Maier, but they still trail equivalent Australian fees by more than half, averaging slightly less than $40,000 year compared with $80,000 in Australia for non-executive directors on the boards of companies with turnovers between $500 million and $1 billion.
The percentage director fee increase in smaller New Zealand companies, with turnovers between $350 and $700 million, has been around 35 percent since 2002 and less than 20 percent for small enterprises. Companies with turnovers of more than $1 billion have lifted their fees by around 60 percent over the same period.
The pressure to increase fees seems to be coming less from an acknowledgment that director responsibility has increased and more from the consequences of working more closely with Australia. According to Maier our larger businesses are more likely to be operating regionally and internationally with activities on both sides of the Tasman. And many of them are now recruiting directors out of Australia. “It’s scarcely surprising that businesses as diverse as [dairy industry giant] Fonterra, EBOS Group [in the healthcare supplies market] and Versatile Buildings have all recently appointed director out of Australia,” she says.
Larger organisations are looking for connectivity into Australia and other markets. They are, therefore, looking more closely at the skills and directors they can recruit from those markets. The logical next question then becomes: “How are these individuals paid in those markets and what do New Zealand companies need to pay them in this market to attract and retain them?”
Maier wants the director survey (see box story) to reflect both good understanding of what’s happening in governance here, and an understanding of what’s happening in Australia, in particular, and the United Kingdom and the United States. She’s boning up on trends and practices in director pay in the US because, while it may not be entirely relevant today, regulatory changes like those enshrined in the Sarbanes-Oxley Act there can have “ripple effect” which can impact quite suddenly. “We need to be aware of what is happening in the rest of the world. We need both the big picture and the tighter New Zealand focus,” says Maier. “New Zealand can’t be successful long term and compete globally if we don’t take on board more of what’s going on in the rest of the world.”
The untenable gap
Maier thinks New Zealand should monitor and understand the importance of Australian governance trends. Australian companies are, for example, more wedded to performance pay for directors, to stock options, variable pay, risk and incentive plans. “And that’s where the rest of the world is,” she adds. “But we don’t really see any of that here.” She accepts that New Zealand companies are generally smaller and that there are fewer publicly listed enterprises, but still thinks “performance pay” concepts can be applied and “used in way that aligns the director interests with the interests and success of the business”.
Maier plans to include Australian summary data in the survey report. “We know their economy is bigger, but for same-size [turnover] businesses the fees are almost exactly two-to-one higher than in New Zealand – whether publicly listed or privately owned. That’s an untenable gap.”
The reality, for an increasing number of New Zealand companies, is that the marketplace for skilled executives and directors is now more regional than local, says Sheffield partner and director Ian Taylor, the brains behind Sheffield’s Academy of Corporate Governance. Sheffield’s counterparts in Australia also have clients requesting information on comparative trans-Tasman fee and compensation levels and packages. “Businesses are now so inextricably linked across the Tasman that alignment [of remuneration] is absolutely paramount.”
No one has yet put data from the two markets together, made comparisons and asked questions such as what it means and what companies plan to do about it. There is, says Taylor, growing perception that directors’ fees should increase. “There is general recognition that the risks associated with being director are now much greater and should be compensated for.”
And talent, both at director and senior executive level, is in short supply. More companies understand that by recruiting talent at these levels they can make difference to organisational performance and add value. “Boards are becoming more closely involved in general accountability for the profitability of businesses, their performance and their long-term sustainability – not only internally but externally with the community as well,” says Taylor. Boards need more skilled directors to deliver that performance.
Director fees in New Zealand have, by any standard, been historically low, says Maier. The pool of non-executive directors has, in the main, comprised successful business people who have “effectively retired”. They have invariably earned their money, had successful business career and stepped aside. But they want to stay involved. Directorships provide way for them to do that,” says Maier, “but directorship was not viewed as real job – more hobby or avocation. If the fees are nominal it’s regrettable. It didn’t really stop good people doing the job because they don’t need the money.”
Things are changing however, she warns. “We have an aging pool of directors at many companies. Now if business wants to be robust and successful with younger generations there is some value in having 40-something year-old director on the board as well.” Younger directors are probably still in mid-earning career and they haven’t accumulated enough funds or assets. Consequently, money is important. They cannot devote the time expected if they are not properly remunerated. “They simply can’t afford to devote three or four days month to board for $15,000 or $20,000 year,” says Maier. “If boards want to attract and retain the next generation they must raise their fees. Money is the object with this group, not simply staying involved with the business community.”
The demographic of New Zealand’s “modern director” is changing, according to Taylor. Boards want balance of the wisdom and experience older, perhaps retired, CEOs provide, plus up-to-date knowledge and expertise that comes through technology development, environmental management and familiarity with topics and issues that perhaps younger generation of managers and directors are more familiar with. This mix of expertise is altering the demographic and driving the shift (in thinking) about what is “fair reward” for their added value and stage of life.
The pressure for pay cheques that reflect the risk and effort involved is coming both from individual directors and from boards which recognise they must up the ante. America’s Sarbanes-Oxley Act raised the bar on disclosure requirements, reporting standards, governance practice, transparency and compliance of every kind. The responsibility for fulfilling those requirements has fallen squarely on directors’ shoulders and in particular on members of specialist board committees.
“One of the most thankless jobs in New Zealand must be an audit committee chairman, especially within listed company,” says Maier. “Much of [the responsibility for accuracy] falls on the audi
