When it comes to advising clients undertaking board fee reviews, public relations experts may be as valuable as we, the remuneration consultants, are.
Pay issues are always and universally emotive. Executive pay has long, and increasingly, prompted market and public outcry. Remember when the media translated former Telecom chief executive Theresa Gattung’s annual pay package into corresponding number of hip replacements? More recently, triggered by the Contact Energy board fee debacle in late 2008, director pay has become equally controversial.
Let’s take look at what is really happening. Since board fees are typically reviewed only every two or three years, there is often ground to “catch up” with the general market. So, proposed pay boosts look high when compared to single year’s market pay movements. And, while proposed increases may seem large in percentage terms – and often are in double digits – these increases are usually calculated on small base fee amounts. The dollar impact, therefore, is often insignificant.
Let me illustrate. For CEO earning $300,000 base salary, one percent pay increase represents $3000. That same $3000 represents 10 percent increase for director on $30,000 base annual board fee. The median New Zealand market non-executive director (NED) fee calculated in the 2011 Moyle Consulting Director Survey is $34,429. The median CEO pay package is $305,000, according to the Moyle 2011 CEO Survey. This is realistic example. And remember, the CEO’s pay is usually annually adjusted.
Moyle Consulting’s seventh annual Director Survey published last December, shows market for director fees rising modestly. In the preceding year, 48 percent of 260-plus companies raised fees. In some cases, fees had not been adjusted since 2006 or 2007, reflecting the market “freeze” in 2009 and into 2010 triggered by the global financial collapse (GFC). When approved, median fee increases ranged from 11 to 12 percent. The actual impact of all increases during the prior year was shift in the median NED fee from $32,297 to $34,429. Hardly runaway market.
The New Zealand market for director fees is, on the whole, low both relatively and absolutely.
Do we overlook the fact that as director of same-size business in Australia, director is paid two to five times more than his or her Kiwi counterpart?
Do we overlook the fact that faced with difficult and uncertain economic environment, boards are grappling with escalating demands and complexity? The great majority of participants in the Moyle Director Survey every year report heavier workloads and greater time commitments.
Do we overlook the fact that recent court cases in New Zealand and Australia underscore the personal legal liability inherent in board membership? Not to mention reputational risk. Shareholder and stakeholder expectations for board members regarding duty of care and strict liability are rising steadily.
Do we overlook the fact that when business struggles or share price drops, its board is blamed first? “Where is the board?” These are invariably situations where boards are expected to step up, commit more time and effort, and face wider array of business and personal risks. These are times to remember that directors do not directly control business results as company executives do. Boards are appointed to monitor strategy, compliance and performance. Indeed, boards are sometimes criticised for being too hands-on in business.
And finally, do Australian director fee levels even matter? I think they do. New Zealand-based companies large and small, private or listed, operate and/or sell into Australia, hire Australian executives, and appoint Australians or individuals with Australian market experience to their boards to gain connectivity and insight into the market.
When New Zealand and Australian directors sit side-by-side at board table – with identical responsibilities and risks – what are the right fees? Can New Zealand company realistically attract Australian-based directors when the fees offered are fraction of what that director earns across the ditch? Should there be two-tiered fee system?
We don’t advocate paying Australian-level fees. However, we think it is inequitable to pay local directors only half or even quarter of fees paid to like-sized Australian companies. To do so undervalues good governance, encourages individuals to serve on too many boards, and is at odds with attracting highly qualified and engaged board of directors.
Board fee increases have always been controversial, as has CEO pay. The Moyle Survey identifies trend toward paying separate committee fees that is in part, reaction to this environment. Some 42 percent of companies in the 2011 Survey do this.
Several factors drive this trend. First, as directors’ workloads rise, more work is allocated to committees. Committees bear more responsibility, and meet more frequently. And there are more committees established every year. Some are permanent, while special purpose committees are established temporarily for one-time projects or important transactions.
This “unbundled” approach more closely tracks and rewards responsibility and contribution. It also creates greater transparency into how boards function and gives shareholders clearer picture of what board is doing.
Sherry Maier is senior consultant at Moyle Consulting/Strategic Pay.
