The earning potential of a board member

Roger Hitchcock, Senior Partner at the Sirdar Group shares some insight on the earning potential of a board member as well as trends and factors that contribute to the earning potential across various sectors. See article below for more info.

It’s not just retired executives that are looking to make an encore career in the corporate boardroom, with technology continuing to change the business landscape younger people are also looking for a seat at the table. So what can you earn as a board member?

How much are board members paid?
Based on the recent Sirdar research findings, for companies with turnovers below R697-million, fees ranged from R10 500 to R470 000 per annum. Companies turning over between R697-million and R1.4-billion paid non-executive directors between R97 000 and R317 000. Companies with turnovers above R1.4-billion set their fees between R92 000 and R1 million per annum.

In South Africa, PwC noted that the median chairperson fee across the entire JSE has risen to R595 000 (from R566 000 in 2017), while overall fees for non-executive directors at the median level increased from R492 000 to R518 000.

How are directors paid?
Ultimately directors are paid based on ‘what they can negotiate’. There is a range of practices currently being implemented, from ‘meeting fees’ through to fixed rates and retainers. The best practice for Independent Directors is for there to be NO link between the amounts paid and the short-term performance of the company (i.e. equity based). This is currently very much a developing area and a work in progress.

What are the determining factors to consider when remuneration is decided?
There does tend to be a number of remuneration thresholds for different sizes of business (size both in revenue and in terms of number of employees) as well as for different business sectors. These will logically remain underlying contributors to the way remuneration of directors is determined since the size and nature of different companies does determine the amounts payable and amounts different companies can afford. They will however probably become less and less of a primary or determining factor as the need to both secure and keep the right people on the board become more and more important.

In light of this, there are some other key points to take into account in determining what remuneration should and could include.

  • Time requirements: in today’s world this tends to be higher than usually estimated – and should include time, not just for meetings but also for preparation (normally between half and twice the length of the meeting time – based on estimates), and also for other ad hoc engagements. King IV™ uses the phrase ‘as often as is necessary’ as a guideline for how often the board should meet – and this varies quite a lot.
  • Specialist/specific skills/experience/input/knowledge or other factors: some people’s time is simply more expensive than others, especially in the case of scarce skills that are becoming more and more in demand at board level. In some European countries when it was mandated that a certain percentage of boards comprised of women, it pushed the fees for a (relatively small) number of women sky-high. A similar thing could happen going forward with the demand for the right level of ICT/Technology/Digital skills at board level.
  • Risk – inherent in the role of directors is the carrying of the ultimate risk and accountability of the company as a whole. The board (individually and collectively) is ultimately accountable for the impact of the company – and under SA Law there are a growing number of stakeholder that can take action as well as avenues for action. The ‘risk’ that board members carry is in a sense inversely proportional to the substance of the board structure and process in place in a company. It is also related to the nature of the business (sector, stage of the business and strategy of the business)

  • Who makes the decision about board director compensation?
    The remuneration framework of the board should be included as part of the remuneration framework of the entire business. The board needs to oversee the development of this framework (which would include the elements to take into account in determining individual remuneration). The current thinking (and growing practice) is that this remuneration framework be put to the Shareholders for approval (at the AGM). This is currently a non-binding opinion where it is being practiced – but it’s anticipated that this will become more and more of an issue as compensation, of both executives and directors, continues to be a ‘hot-topic’ in the governance space.

    Some key insights from the 2018 Sirdar research findings:

  • Non-executive director fees in the finance, insurance and real estate sectors are less driven by employee numbers as in other sectors. The transport, storage and communication sector ranks among the best paying regardless of employee numbers.
  • The wholesale and retail and business consulting sectors have the largest fee spread, ranking below par in enterprises employing fewer than 100 employees, but rising dramatically when employee numbers increase. The wholesale and retail sector shifts from the lowest paying (under 100 employees) to the highest paying sector (above 100 employees).
  • Non-executive directors’ fees paid in the manufacturing sector are linked to employee numbers. Ranking among the lowest paying sector for companies employing fewer than 100 people. The sector is middle-ranked for companies with over 100 employees and the highest payers for companies with more than 1 000 employees.