Non-executive directors see pay levels drop

NON-EXECUTIVE directors in companies across the UK have seen their fee incomes drop according to a new report.

Non-executive directors (NED) in companies of all sizes received pay rises 15.6% lower than the previous year as roles become increasingly aligned with the scope and responsibilities of the job, according to the PricewaterhouseCoopers annual guide Non-Executive Director Practice and Fees.

Formal reviews of corporate governance and board effectiveness is becoming increasingly prevalent in UK companies, with 84% of respondents conducting annual performance reviews of their board.

In addition, the average director’s time commitment has risen from 15 days in 2003 and 20 days in 2007 to 21 days in 2008.

The report is compiled by PricewaterhouseCoopers pay survey unit Monks to help remuneration committees review their NED terms and conditions.

It provides a guide to the composition and practice of main boards and committees in UK companies and the service commitments, fees, facilities and benefits of NEDs.

Martin Hodgson, partner at PricewaterhouseCoopers, said: “The rate of fee increases is levelling off as non-executive directors and the boards that employ are working harder to balance fees with the responsibilities that come with the role.

“We’re seeing much more emphasis on reviewing fee structures and levels – over half of the companies we surveyed had carried out a review during the last 12 months. Historically, non-executive directors’ fees were reviewed every three years so this increasing frequency signals a significant shift.

“The type and size of organisation and the number of service days all have an impact on the fee levels, together with the specific responsibilities of non-executive directors, which in part explains the wide range of fees now paid to the chairman.”

The survey showed a difference of market practice between smaller and larger organisations with regards to outside appointments.

In companies with revenues up to £500m, over half (51%) of companies have no executives serving on another companies’ board and are less likely to encourage executives to accept a non-executive appointment.

Almost two thirds (62%) of companies with revenues over £500m have executives serving on other companies’ boards.

The percentages were 52% and 59% in 2007.

Payment of non-executive directors in shares – although the Combined Code explicitly prohibits the award of share options to non-executives (Combined Code Provision B.1.3), a small number of companies do provide part or full payment of NED fees in the form of shares.

Payment of non-executives in shares is still a minority practice, with only 3% in industrial and service and financial companies doing this.

Martin Hodgson, partner at PricewaterhouseCoopers, said: “As fee increases become more moderate we can expect more focus by institutional shareholders on the disclosure of the NEDs’ effectiveness rather than merely what they earn.

“To date, such disclosure has been more to confirm companies are compliant with the Code rather to indicate the quality of the review and key action points – we expect to see this change over the next few years.”