Aligning Non-Executive Directors Remuneration Expectations with Shareholder Interests

Shareholders and remuneration committees have been very active in the second quarter of 2019, with multiple reports of instances where shareholders raised questions on NED pay. In this second post of a two-part series, we will explore some common ways Boards can better align NED remuneration to shareholder interests.

Aligning Non-Executive Directors Remuneration Expectations with Shareholder Interests

1 Aug 2019 by  Rahul Chawla & Jacob Tan

Questions have been raised on executive and directors’ pay in Southeast Asia and across the world, with Standard Chartered being in the news most recently in July 2019, after more than a third of shareholders voted against its directors’ remuneration policy and questioned the bank’s executive pension pay levels instead. A month prior to that, NED remuneration for a leading conglomerate in Malaysia was voted against by its shareholders, due to reservations against the remuneration proposed especially for the Chairman of the Board, who had allegedly committed a disproportionate amount of Board time to turnaround the ailing company.

Such cases, where shareholders challenge executive and non-executive directors’ remuneration in its absolute sum, pose two fundamental problem statements for us to think about:

  1. How do we align directors’ remuneration to shareholder interests?

  2. How do we recognise directors’ contribution to the organisation during a period of change or transformation and are all directors to be treated equal in their contributions?

Alignment of NED remuneration

While a significant portion of the total compensation for most executives comprise equity, the cash vs equity conundrum is a trickier one to solve in the case of NEDs. In Singapore, it’s a split verdict – half of companies with market capitalisations of more than US$10 billion award equity to directors, while the other half do not. These shares usually have some holding requirements (including post-retirement) to create alignment with shareholders especially in terms of time horizon of risk.

Some decisions that the Board makes (e.g. entering into M&As) may have a downstream impact and reflect in share prices at a later stage. Ensuring directors are only able to access their shares after a certain period of time allow for shared responsibility of such decisions.

As quality of disclosures is becoming more robust across jurisdictions, shareholders are also becoming increasingly aware and careful about the perquisites and benefits offered to NEDs. Globally, there is a move towards providing fees to directors and only basic benefits like transport-related benefits like car and driver. In certain cases, and jurisdictions, benefits like housing, club membership and insurance are also prevalent. These, and a few other retirement-related gifts do not cross the line of benefits which are typically disclosed and hence, are not subject to scrutiny.

However, regulators are becoming increasingly prescriptive about disclosures of benefits. Hence, there is a need to relook at benefits provided, to ensure that they are not excessive but rather, are competitive enough to attract the right calibre of directors.

Recognition for contribution during periods of change

There are a few typical scenarios which place calls on NED time, which are over and above the regular cadence of meetings. These could be corporate transactions such as an acquisition, period of transformation in the organisation or a transitionary period for the CEO. These may require dedicating time to discharge duties in the form of additional meetings or forming special committees.

Approaches to remunerate directors for the ‘active’ role they could be playing in special scenarios include:

  1. Benchmark to existing committees: The additional remuneration can be calculated based on existing committees and fees, as well as the time and effort required to discharge the additional responsibilities. This approach ‘values’ additional time spent during change with the same lens as time spent in normal course.

  2. Opportunity cost of time: In today’s digital age, where work can happen from anywhere, on any platform and at any time, remunerating NEDs for the opportunity cost of their time may not be a far-fetched idea any more. Especially in scenarios where special skill sets of NEDs need to be called upon, which otherwise would have required additional ad hoc hiring of talent, Boards can benchmark compensation for similar jobs/skills in the market and adjust the total quantum for additional time spent.

Remunerating directors for special skills sets or experience can have a positive impact on attraction and retention of the best-fit directors for an organisation’s context, especially in times of change and transformation. Rather than this being a one-off event, firms appoint Lead Independent Directors (LIDs), who are remunerated differently by way of additional fees. In fact, an analysis of public disclosures on NED fee frameworks show that 73 percent of companies that have LIDs on their Boards adopt this practice*.

Ultimately, NED remuneration should not only be robust enough to attract the right calibre of directors who are can steer the organisation through transformation but must also be aligned to shareholder interests. As shareholder activism and regulatory guidelines drive more disclosures on remuneration, organisations will need to be clearer and transparent on their NED remuneration strategy and structure as well as its impact on overall cost of governance. External and internal context will play a significant role in defining these.

Rahul Chawla & Jacob Tan

Rahul Chawla is a part of the Human Capital Solutions team in South East Asia and leads the practice for Malaysia. With a background in strategy & HR, Rahul is passionate about empowering results through solutions which are relevant in the business and macro-economic context.

Jacob leads the Executive Compensation Solution for South East Asia. His experience includes benchmarking for executives and board of directors’ compensation, board evaluations, and employee share plan design and implementation, amongst others.

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Rahul Chawla
Jacob Tan