Revisit NED remuneration policy to conserve cash and increase alignment
Traditionally, UK NEDs have been paid an annual cash fee, supplemented, in some cases, by additional cash for chairing or being a member of a Board committee. Participation by NEDs in annual bonus plans and performance-related share options or LTIs is opposed by investors and good corporate governance guidance. Some investors have gone even further and have written to companies to inform them that they will vote against share option proposals for executive directors, too.
These are not normal times. CFOs are keeping an even closer than normal eye on cash. Companies of all sizes have had to adapt their business models to help them emerge successfully from a crisis with an uncertain future. Their remuneration policies and practices, if they have not done so already, will also need to adapt.
There are well-publicised examples of CEOs agreeing to take a salary cut. Many of their non-executive colleagues will have done the same. Compared with executive remuneration, however, NED fees represent a significantly lower drain on a company’s cash. Nonetheless, research done following the 2019 AGM season shows that the median fee for a FTSE100 Chair was in excess of £400,000. In the FTSE30, the median was more than £650,000. The corresponding amounts for NEDs were broadly in the range £70,000 to £90,000. Additional fees for committee membership could easily add £10,000 to £20,000; more for the committee Chair. So, the cash outlay for NED fees can be significant. For smaller companies, in particular, conserving cash, by whatever means, is their top priority.
Agreeing to take a temporary cut in salary or fees is an immediate response to an immediate problem. But what about the longer-term shape of NED remuneration?
Non-executive directors of US public companies receive annual restricted stock unit awards in addition to an annual cash retainer. Walmart NEDs receive annual stock grants worth $175,000 in addition to an annual cash retainer of $90,000. NEDs at Apple receive annual RSU awards worth $250,000 plus an annual retainer of $100,000.
Ten years ago, International Corporate Governance Network (ICGN) guidance recognised that properly structured equity-based compensation for NEDs, which is not performance-related, creates an immediate alignment with investors. Current Investment Association (IA) guidance, whilst also opposing share awards linked to share price or corporate performance, encourages share ownership by NEDs. Echoing the earlier ICGN guidance, current IA guidelines state remuneration committees should be free to select remuneration structures which are appropriate for their specific businesses.
Recently, MM&K has been working with clients which, having a pressing need to conserve cash, have sought to adapt their NED remuneration policies to substitute cash fees wholly or mainly with share awards. Calls for restricted share awards, of which a nil-priced option, not subject to any performance conditions on vesting, is a form, are gaining ground, even if the arguments are not yet fully accepted by all investors. Earlier this month, Lloyds Bank plc was successful in gaining shareholders’ approval for a deferred (restricted) share plan but the majority in favour was only 64%.
In our 2020 Chair and Non-executive director survey report, “Life in the Boardroom”, which is on sale now (contact us if you would like to purchase a copy), 53% of respondents reported that the demands on NEDs’ time are increasing. That is likely to lead to upward pressure on costs (because either more NEDs will be needed or existing NEDs will have to bear a greater load and will need to be compensated accordingly).
Introducing share awards for NEDs could help to conserve cash and create alignment with shareholders but raises a number of issues in light of current governance guidance and practice. Operating within a strong governance framework is important for all companies. Proposals to make such a change to remuneration policy require careful thought, not least in connection with the terms of the awards and to make the case to shareholders that the policy is in the best interests of the company. Flexibility will be required on all sides and engagement with shareholders will be an essential element of the process.
For further information or if you would like to discuss points or issues raised in this article, please contact Paul Norris.