As the demands placed upon non-executive directors (NEDs) continue to ramp up, it has kickstarted debates about what constitutes appropriate remuneration for the role. Pay too much and NEDs risk being potentially reluctant to rock the boat, but not enough and you may struggle to compete in an increasingly competitive global market.

A report issued in March by advisory firm WTW warned that European boards could be missing out on a top global talent pool of non-executive directors because current pay is failing to keep pace with the increasingly onerous demands of the NED role.

Complexity and time commitment increase

More than nine-in-10 (92%) non-executive directors agree that the complexity and time commitment of their roles has increased over the past three to five years, while four in five (81%) believe they are not adequately compensated for their role. 

Average compensation paid to NEDs varies considerably across European countries, with the median level among largest companies of main European indexes around €150,000 (£126,000). In the US, average S&P 500 companies non-executive director compensation was $310,000 (£239,000) in 2022.

Manuel Montecelos, Senior Director, Executive Compensation and Board Advisory at WTW, says: “If we want to ensure boards are equipped with the best experts, we need to review non-executive pay structures and future proof competencies and skills for non-executive directors, in the same way that we manage other talent pools. 

“In the past five years, non-executive board members have required more technical expertise and an increased time commitment, and have taken on more professional risk, while remuneration has remained unchanged. Fair and socially responsible pay is needed for non-executives to attract and retain the right candidates with the specialist expertise required to fulfil their roles. Otherwise, companies risk missing out on top talent.”

Benchmark against peers

The WTW report recommends that board fees should be determined by benchmarking against relevant peer groups of companies, taking into consideration the company’s size as an indicator of pay levels for NEDs. Additionally, companies could also look at the amount of time required for directors to perform the board mandate.

Sandy Pepper, Emeritus Professor of Management Practice at the London School of Economics and Political Science, says he stood by the UK model of non-executives being paid a fixed fee, with additional payment for sitting on more than one board committee or for being a board committee chair. 

“It’s certainly true that the responsibilities of NEDs have increased significantly in recent years, but their fees have increased too, and I suspect they are mostly about right. Across Europe, different rates apply in practice. There is certainly an argument for saying that, in the case of large, listed companies operating internationally, rates commensurate with those paid in the UK are justifiable.”

NEDs should be “demonstrably independent”

However, Pepper said he wasn’t convinced by the argument that NEDs should be rewarded with shares rather than cash, as is common practice in the US, supposedly to ensure their interests are more closely aligned with those of shareholders.

“I think NEDs should be demonstrably independent,” Pepper says. “They have a wider set of interests to take account of, not just those of shareholders. There is an element of ‘service’ in the NED role which cannot be, and should not be, extrinsically rewarded and relies instead on intrinsic motivation. Good people, of good character, make good NEDs. While they should be compensated for their time and expertise, they should not need to be highly incentivised.”

The ability to walk away from a role

Peter van Veen, ICAEW Director, Corporate Governance and Stewardship, says it would be a big worry if being financially over reliant on one particular non-executive role made a NED afraid to ask certain questions or to rock the boat. 

“You need to be able to walk away from the role if, for example, you fundamentally disagree on the strategic direction of the company. In that respect, more pay could lead to NEDs limiting their portfolio to one or two roles and this reduction in sources of income could act as a deterrent to NEDs challenging the chair or the CEO,” van Veen says.

The question as to whether NEDs are paid enough really comes down to what is expected of them and the workload, van Veen says. And while pay needs to be market rate, when it comes to due diligence for a role, it should not be the deciding factor. 

“There are many other questions potential NEDs should be asking: is this the right board culture for me? Have I got the right experience? Am I bringing the right skills? What kind of risks does this company face? And will I be able to challenge and ask the right questions and will my views be listened to? If that doesn’t stack up, you should think twice about taking on whatever the company is offering as the carrot.”