DIRECTOR REMUNERATION : The value of directors – Trans-Tasman director pay gap narrows but still concerns

Pay rates for New Zealand’s non-executive directors remain far below their Australian counterparts, despite locals receiving healthy pay increases over the past year, according to the 2007 Director Remuneration survey conducted by HR consultancy Sheffield.
Australian non-executive director fees, in comparably sized businesses, are 50-150 percent higher than those paid here. Adding to the disparity, the vast majority of Australian firms also offer share purchase or share option schemes, as well as generous superannuation benefits.
So is it case of ‘pay peanuts, get monkeys’ for New Zealand businesses? Are the low pay levels for directors stunting not only individual organisation growth, but that of the entire economy as we fail to attract our best and brightest to the nation’s boardrooms?
While not going as far as the monkey statement, Sheffield’s senior reward consultant Sherry Maier believes local businesses are on the back foot when it comes to attracting top directorial talent. She is also surprised that board fee gaps still far exceed executive pay differentials.
“We pay competitively for top executives, to get and retain them, but we don’t do the same for directors. Do we undervalue good governance? There’s saying that you get what you pay for,” Maier says.
“I think this is pretty eye-catching stuff. It’s not only inequitable but it’s also likely to discourage the country’s best talent from serving on boards. There’s also an opportunity cost to all involved if you don’t have the best talent around the board tables in New Zealand.”
Maier questions how these potentially triple-digit gaps with Australia are explained, saying surely nobody believes that Australian directors are working twice as hard, are twice as liable or are making contributions twice as valuable as their New Zealand counterparts in similar-sized businesses?
She believes that alongside minimal movements in the state sector (more on that later), another factor that depresses fee levels is the different composition of directors here versus Australia.
Unlike Australia, where professionally trained, highly selective and well-paid director class has developed largely from corporate origins, New Zealand tends to rely more on large and steady supply of partially retired individuals who enjoy the involvement and service aspects of serving on boards, but who are generally not wholly reliant on the income. Such individuals typically do not exert pressure to raise board fees to more appropriate and competitive levels, says Maier.
“How does New Zealand expect to compete if they have boards of older, more conservative people with less commercial experience?”
The news is not all bad: the gap is closing, albeit slowly. New Zealand saw 14-15 percent year-on-year non-executive director fee increases compared with the 9-11 percent raises experienced in Australia in 2006.
“This raises related issue. We find the level of disparity in executive pay levels between the two countries – again between comparably-sized businesses – is inconsequential when compared with the enormous gaps seen in board pay. How can New Zealand business justify the inconsistency of paying top executive team at highly competitive levels to attract and retain the best talent, while paying substantially below-market fees to the board of that same business?” Maier asks.
“Robust corporate governance is critical and demands that the many contributions of directors be valued properly.”
Minimal increases in the public sector – where directorships are viewed as public service duty – mean the overall New Zealand figures are held down, but Maier also has questions about the government approach to directorships.
“Have [some of the government appointed directors] really got what it takes to improve the value of those businesses? It also sends the message that we don’t value what they do if we pay them, as directors, fraction of their consultancy rates,” she says, adding that the public sector does perform strongly in the diversity stakes.
“But how does New Zealand expect to compete if it doesn’t improve the performance of all its organisations – public and private?”
Surveying 259 New Zealand organisations, Sheffield found that over the past year (to 30 June?????) the median base fee paid to non-executive directors was $27,861 and the median increase in those base fees was 15.6 percent. For board chairs, the median base fee was $52,000 with median base fee increase of 14.3 percent. These percentage rises far exceed New Zealand’s 2006 executive pay increases which ranged between five and six percent, as calculated in Sheffield’s annual Executive Survey.
Maier notes that given these annual gains were achieved during period in which almost no increases were received by directors and chairs on the boards of almost 50 State and Crown Entities in the Sheffield database, the private sector was making even more dramatic moves.
The survey also found the time commitment and workload expected from board members had increased, with 78 percent of boards now meeting monthly, up from 65 percent year ago. Additionally, the typical median time commitment involved in single directorship was 29 days per year, up from 25 days year ago, with chairs’ time reported as approximately double that.
“Our respondents told us that an increasing amount of work is being done in committees – such as audit and remuneration committees – yet only third of the surveyed organisations paid separate committee fees,” Maier says, adding that Sheffield advocates the payment of committee fees as best practice, since such “unbundling” may better reflect actual time commitment and workload.
“Consistent with past surveys, 75 percent of respondents indicated the growing risk exposure involved in directorships over the past five years, with an alarming 26 percent reporting they had had negative experience in just the past year! Boards are increasingly under media, shareholder and stakeholder scrutiny and operate squarely in the public spotlight. Everyone can easily name high profile cases where board performance and judgement has been called into question,” Maier says.
Some strong correlations continue within this year’s data. Director fee levels correlate well with organisation size, especially revenues. Also, as in the past, chairs were consistently paid at twice the level of non-executive director, reflecting the greater time, responsibility and accountability involved.
Maier says one of the overall key survey findings was that only 17 percent of non-executive directors and six percent of board chairs were female. Board diversity is an area where the public sector has long shown stronger leadership, reporting 32 percent females among non-executives director ranks.
Other key findings of the survey include:
•Non-executive directors of Auckland-based organisations are paid at the highest levels with median of $35,500 per annum, compared to $25,000 in Wellington and $24,500 in Christchurch. For the first time, Christchurch is the lowest of all locations surveyed.
•Given their typically larger size and complexity, directors of publicly listed companies are paid – not surprisingly – the highest median fees at $37,724, nearly 50% higher than the $25,000 paid by privately owned businesses and $21,750 in the public sector.
•Almost every board of directors has chair, and 98 percent of boards have non-executive directors. However, only 33 percent of boards include an executive director and only 45 percent have deputy chair. Deputy chairs are most common in the public sector and have traditionally been used as step in succession plan. Deputy chairs roles are relatively rare in Australian firms.
•Over two-thirds of directors are sourced using either external search consultants or networking and referrals. External search consultants are used by around 33 percent of organisations, up from 27 percent in the previous Sheffield survey. This is the third consecuti