The remuneration of non-executive directors

Non-executive directors are not company employees. They receive a fee for their services, not a salary. The fees are usually for attending board meetings, some committee meetings and general meetings of the company. The principle that individuals should not decide their own remuneration applies to NEDs as well as to executive directors. This means that a remuneration committee should not decide the fees of the NEDs. Deciding the remuneration of the NEDs should be the responsibility of the board (or the shareholders if required by the articles of association). Where permitted by the articles, the board may delegate this responsibility to a committee which might include the CEO. A provision in the UK Corporate Governance Code is that the level of remuneration for NEDs should reflect the time commitment and responsibilities of the role. A company may permit an executive director to serve as NED on the board of another company. When this happens in the UK, the company must disclose in its annual remuneration report a statement about: whether or not the individual is allowed to retain his earnings as NED, instead of handing them to the company, and if the director does retain his earnings as NED for the other company, the amount of the earnings must be disclosed.

NEDs may receive other forms of remuneration or reward from the company, in addition to a basic fee, but this could raise questions about their independence. After Enron collapsed in the USA in 2001, it was revealed that a number of NEDs had obtained benefits from the company in addition to their basic fee as NED, and their lack of independence may have contributed to the company’s difficulties. For example, a NED might be paid additionally as a consultant to the company. No matter how genuine and useful these consultancy services are, they put his independence at risk because the size of a consultancy fee is decided by executive management. Management also has the decision about extending or renewing a consultancy agreement.

If a NED creates trouble for executive management in board meetings or at board committee meetings, there is always the chance that the consultancy agreement will be axed. If he is supportive, the fee may be raised. A consultancy agreement could also bring a NED and the executive management into a close working relationship, such that the independence of the NED is compromised, possibly through friendship or learning to look at problems from a management perspective.