On 5 November, the Financial Reporting Council (FRC) issued updated guidance on non-executive director (NED) remuneration to clarify the existing position in the UK Corporate Governance Code 2024 (the Code).
The update to the guidance does not alter the Code but clarifies how in line with the Code’s ‘comply or explain’ nature, companies have autonomy over how they structure NED pay so long as NED independence is not compromised. To this end, the FRC has confirmed in Section 5 of the guidance (‘Remuneration’) that boards may pay NEDs part of their fees in shares to align directors with shareholders and promote long-term commitment.
Paragraphs 322 to 324 of the guidance now explain that although Provision 34 of the Code states that share options and performance-related components should not be included in NED remuneration, ‘boards may choose to pay non-executive directors a portion of their fees in shares (for example, purchased at market price)’. Performance-related pay remains inappropriate for independent NEDs to preserve their independence.
ICAEW Corporate Governance Manager, Victoria Geroe, said ‘this is a welcome clarification given that the FRC has maintained from the outset that the Code promotes flexibility over a one-size-fits-all approach to corporate governance in the UK. The updated wording reinforces this flexibility, reminding companies that they may structure NED remuneration to include shares if they are transparent about the rationale and preserve director independence. It remains that companies must ensure that remuneration practices do not compromise the balance of independent NEDs on the board as required by the Code. This clarification should be a positive step towards increasing the UK’s competitiveness by encouraging top talent to join and stay on UK boards’.
