This article asks questions in deliberately inflammatory manner!
During September, the Herald on Sunday ran column to attempt to explain the conundrum… Why directors are paid so much and why are their pays rising faster than the wages paid to those on the shop floor?
I commented on this topic and the themes that were reported, accurately, but out of context were these:
The job of director is simple or, put another way, is not hard. Remuneration for public company director is about $30,000 per basic directorship yielding an income for full-time professional director of $150,000 per annum, thus directors in general are overpaid not underpaid, and finally that the job of director of public company is akin to community service.
One prominent public company director summed up the likely reaction of your readers to such thoughts when he described my quoted comments as those of “deranged socialist”.
What is driving director pay and what should be driving it?
Director pay is being driven by three key factors, none of which are relevant. The first is directors’ perception of themselves. I have heard prominent directors at IOD conferences deal with the vexed issue of director reward by saying that professional full-time director is akin to senior partner in law or accounting firm and should be paid accordingly. That is how they come up with $80,000 to $150,000 per annum per directorship. It is interesting that directors think of themselves as accountants and lawyers.
Directors who regard themselves primarily as accountants and lawyers should not be serving on boards. What lawyers and accountants may be paid is of no relevance to the worth of director.
The second factor is international comparisons, both as to general levels of fees and fees relative to size and risk. What Australian directors get paid is mostly irrelevant to the service of directors in New Zealand.
Why should directors be paid for taking risk? All public companies pay Directors and Officers insurance to protect them from financial risk personally, they cannot and should not expect to be indemnified against reputation risk, and nor should they be paid to take such risk. The best way to preserve one’s reputation is to do good job.
The final factor is the effect of surveys on average income. I am yet to meet board that thinks of itself as below or even average. Thus surveys are used to justify increases.
There are only two factors that are relevant to board pay – the first is performance and the second is opportunity cost.
If you want to attract top board members you have to pay them at level that compensates them for turning down the next best alternative.
So where did the $30,000 come from? Simple, old duffers with nothing better to do than play golf are more than adequately compensated for being deprived of their leisure with fee of $150,000 for full-time equivalent. Sadly many board members of public companies fall into this category. This is not to say that they are not wonderful contributors, it is just that their time has no significant opportunity cost.
What is the job of director of public company?
The job of any director is to supervise the creation of value for owners; if they succeed, they have performed. In addition they have the job of recruiting, rewarding and mentoring management, and checking the results of management and reporting faithfully and fairly to shareholders. None of this sounds particularly hard to me. That is not to say that some decisions won’t be hard or hard to make.
As the agent of shareholders you hold fiduciary position where those to whom you are responsible are totally incapacitated and utterly dependent upon the quality of your decision making.
How much more like community work could it be? If you want to be director of public company and you don’t accept that social work is part of the task you really should give it miss.
So directors who do it for money, without having view of how they will deliver value for the price they are paid, should not be appointed. Those who do it for free as social service should not either. Somewhere in the middle is where the truth lies.
Bruce Sheppard is the president of the New Zealand Shareholders’ Association. www.nzshareholders.co.nz
