What is a non-executive director worth? The debate about top executives' remuneration goes rumbling on, but the question of how much their part-time colleagues should be paid is seldom discussed.
A few years ago many businesses - even major public companies - appeared to make a practice of rewarding their non-executives as cheaply as possible, which invited the old jibe about paying peanuts and getting monkeys. More seriously, it weakened the position 15e of part-time directors by demonstrating how little they were valued. Today, non-executive emoluments - like those of executives - are very much on the increase. A couple of examples, more or less at random: British Telecommunications, one of the few companies that gives its non-execs service contracts, put their pay up by 36% last year. The company explained that this was the first rise in four years, and that the amount - a £6,000 increase to £22,500 - was designed to bring remuneration into line with the `going rate'. P&O, meanwhile, doubled the amount it pays its non-execs to £25,000. Five years ago P&O's part-timers had to be content with a mere £8,000. `The fees of non-executive directors are quite properly going up as the demands made on them are going up,' observes Colin St Johnston, managing director of Pro Ned.
There's no argument that a seat on the board is seldom a sinecure these days. Research by Coopers & Lybrand suggests that the bigger the company, the more time-consuming the job. And, inevitably, the bigger the role the greater the pressure: `The institutions are increasingly using non-executives as a proxy,' notes the chairman of one FTSE 100 company. `It puts them in an awkward situation.' Moreover the non-exec's workload is expanding at every level. A survey by 3i showed that independent directors put in an average of 22 days per directorship in 1994, compared with15 days in 1991. In a separate study, Pro Ned found that nearly 90% of companies expected their non-executives to sit on an audit committee (55% in 1992), and over 70% involved them in strategy meetings (60% two years earlier).
It's difficult to quarrel with the principle of a fair day's pay for a fair day's work. Stuart Bell, director of Pensions and Investment Research Consultants, observes that non-executive pay rises have been widely supported in the investment community. But problems arise, he adds, if `individuals come to be seen as professional non-executives - when questions are raised over the level of dependency that a director can develop'. The Cadbury Committee was obviously alert to the potential conflict: `On fees there is a balance to be struck between recognising the value of the contribution made by non-executive directors and not undermining their independence.' The head of 3i's independent directors programme, Patrick Dunne, spells it out simply: `If fees are too high it devalues one important function of independent directors - to be free to express views unpopular with those who pay their fees'.
So how high is too high? Peter Brown, chairman of Top Pay Research Group, offers a possible rule of thumb: `If non-executives' fees are more than 30% of [their] total income, there is a danger they may be unwilling to sacrifice that amount.' Thus the answer might be to pay non-execs up to 30%, approximately, of their total income. Pro Ned's St Johnston, on the other hand, regards this solution as impractical - `very difficult to administer' and calling for `an invidious form of means testing'. The whole thing, he concludes, `would be rather seedy'.
Whether it would be seedy might depend on how it was handled. Anyway, here's a subject that's worth thinking about, since the `going rate' is hardly a free-market rate but one that is determined by what companies elect to pay. Pro Ned's survey suggests that public companies typically expect to raise directors' fees by a further 10% over the next two years. It's a fair bet that they are not budgeting to increase wages in parallel.