Directors’ fees – a specialists’ perspective

In New Zealand most boards review their fee levels only every two, three or four years. Can you imagine telling any executive that there is no annual pay review, and you’ll take another look in three or four years to see if pay is still competitive? By Sherry Maier.

Across New Zealand as a whole, directors’ fees levels continue to “inch up” by two to five percent per year. While these percentages may seem high relative to CPI movements or base salary increases, keep in mind these are calculated on very low bases. A five percent increase for the market median base annual director fee of $35,000 is only $1,750 – really insignificant dollars spent for good governance. Compare this with a five percent increase for a chief executive with a base salary of $300,000 – this results in a $15,000 rise – certainly worth thinking about.

However, the market (following the longstanding media focus on percentage movements rather than absolute dollars) continues to be constrained by this percentage-based approach. 

Boards are hyper-aware of percentage movements, since “appearances” are so important to both the media and consequently, shareholders. While the total board fee pool may be disclosed and considered, pool figures are often muddled by the addition or deletion of a board seat, addition of committee fees or creation of a new committee, so the simplest analysis tends to look solely at base annual fees. In short, board fee increases have become a public relations exercise. 

Another legacy issue in New Zealand is that most boards review board fee levels only every two, three or four years. Can you imagine telling any executive that there is no annual pay review, and you’ll take another look in three or four years to see if pay is still competitive? 

As a result of these long intervals, board pay may get so far behind the market that catching up requires a double-digit increase – anathema to the market which sees this as pure greed – and overlooks the fact there has been no adjustment in recent memory. 

Adding to the difficulty of raising fees after a lengthy interval, is that there is never a good time to raise fees. Unless the organisation is performing strongly, there is a view that it is inappropriate for the board to consider an increase. Few organisations can meet this standard: there are always challenges or setbacks or complications that suggest that further delay in fee review is a safer bet. 

In fact, times when organisations do confront challenges or need to navigate through difficulties is probably when the board’s skills, experience and time are most needed and of most value. Delaying review of board fees until we’re back in clear waters with no clouds on the horizon may mean a very long wait. 

For all these reasons, we advise clients to conduct annual reviews and make minor annual adjustments at a level as to be “un-newsworthy” and considered part of the normal annual business process and operation. 

Executives generally get modest increases every year – barring disastrous company performance – why not boards? This approach can really take the heat off, compared to occasional large “catch-up” adjustments that simply look bad.

Board fees for New Zealand companies tend to be a third to a half of fee levels paid at comparable-sized businesses in Australia – the most relevant market. These gaps have long existed and in fact, have widened over time. 

In our view, the single largest contributor to the relatively low level of board fees in New Zealand is the depressing effect of the large public sector ownership of New Zealand businesses and assets. State-owned Enterprises and Crown entities own and control a significant proportion of the country’s assets. Boards of these organisations are paid based on conservative fee frameworks. 

Since there is a seemingly endless supply of individuals (qualified or not) who are willing to serve on these boards, there is no market tension to pay competitive fees to attract top calibre, experienced directors. As a result, it has been eight years since most SOEs have enjoyed a base fee increase. There have been a few exceptions to this, often reflecting inability to recruit suitable directors at existing rates. 

Since base fees have not been adjusted for SOEs and Crown Entities, there has been a steady increase in “special fees” paid to certain organisations to retain current directors or to reflect additional, one-time projects. This was the case for the MOM companies (Mixed Ownership Model) including Meridian, Mighty River Power and Genesis Energy. Special fees have become a work-around used when base fees are inadequate for the risk and time involved in the directorship. 

Besides such special fees, we see an on going trend toward “unbundling” fees and paying separate committee fees to both committee chairs and committee members. Over time, it appears to us that more and more board work has devolved to committees, and committee responsibilities widened. 

We support this approach as being more direct and transparent and attributable to actual work done. Paying healthy committee fees also reduces pressure on raising base annual fees – another way to deliver pay for the work done without the high public profile.  M    [email protected]

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