GRG Remuneration Insight 117

by Denis Godfrey & James Bourchier


There appears to be a double standard when it comes to KMP remuneration which can only be explained by either a proliferation of selfless conservatism among NEDs, or a willingness to treat executives differently to everyone else. Our recent analysis of non-executive director (NED) fee increases and senior executive Fixed Pay increases over recent years indicates that NED fees are not keeping pace with the Fixed Pay of senior executives, or even the stagnating movements of general employee markets. This has occurred during a period when the performance of NEDs has been under increased scrutiny and Board workloads, risks and responsibilities have grown significantly. Leading companies have dealt with this by introducing NED equity plans, which do not count towards aggregate fee limits or fee pools. Lagging companies that have not introduced NED Equity Plans (NEPs) will soon need to respond to this circumstance by making significant adjustments to NED fees that may attract attention, particularly if aggregate fee limits (AFLs) need to be increased.

Disparate Movement Observations

The table on page 3 presents median market movement for the indicated periods based on same incumbent remuneration disclosures for NED fees and senior executive Fixed Pay. It is noteworthy that:

  • A similar trend was evident across all industry sectors,
  • Board Chair fee increases were generally similar to the NED fee increases, and
  • CEO Fixed Pay increases were generally similar to the senior executive Fixed Pay increases.

The data presented below indicates that NEDs and senior executives in companies with market capitalisations of $1 billion to $5 billion have received increases of approximately the same magnitude. However, in all other market capitalisation ranges the NEDs have received much lower increases than senior executives.

The P75 increases for NEDs were substantially higher than the median increases which may mean that a minority of companies have sought to address the imbalance in increases between NEDs and senior executives through one off substantial increases.

The Base Case

GRG has been advising companies for many years that NED fees should be adjusted with small frequent increments rather than periodic large increases. This view was aimed at avoiding criticism from proxy advisors and other stakeholders who often react negatively to large fee increases made in a single reporting period. The recent history of low NED fee increases indicates that a backlog of increases that have been held-off in recent years is likely to come through in the near future – assuming patterns observed in previous cycles hold.

It is also recognised that seeking shareholder approval for an increase in the AFL for NED fees should be managed as part of normal remuneration processes rather than as a response to accommodate large increases in fees. If there is criticism of a large increase in fees in one year then it may be more likely for shareholders to vote against an increase in the AFL.

Those companies with little headroom left in their AFL may need to act swiftly before the upcoming annual general meeting (AGM) season to have the market competitiveness of fees assessed and to receive advice on the level of increase that should be considered. Such advise should also cover the new AFL for which shareholder approval should be sought at the next AGM.

Those companies with adequate AFL headroom would not be constrained by the AFL in granting fee increases and should ensure that regular adjustment to fees are made to ensure that market competitiveness is maintained.

An Equitable Alternative

Leading companies have recognised that external stakeholders see it as important for NEDs, like other KMP, to have “skin in the game” in the form of equity holdings. It may surprise many readers to learn that grants of equity to NEDs, when approved by shareholders, do not count towards the AFL. This is so unintuitive that GRG wrote to the ASX to confirm this; and it was confirmed.

It should be noted that all grants of equity to NEDs must be approved by shareholders unless onmarket purchases of Shares exclusively applies to the exercise of the instrument; even then, good governance standards indicate that shareholder approval should be sought. This opens up a pathway to provide NED fee increases even when there is no room left in the AFL, and in a manner that is likely to be well regarded by external stakeholders. There are broadly three approaches to NED equity plan arrangements:

  • Compulsory: instead of a cash fee increase, the Board determines that part of Board Fees will be settled in the form of equity in the future – likely to be better regarded than a cash fee increase,
  • Voluntary: cash Board Fees are increased, and NEDs are offered the opportunity to sacrifice cash fees into equity grants, thus reducing their draw on the AFL, or
  • Hybrid: the Board specifies a compulsory level of equity as part of Board Fees and invites NEDs to sacrifice further cash fees for equity grants.

Often these arrangements are accompanied by the introduction of a NED Equity Holding Policy; typically containing a holding objective of 1 x Board Fees within 3 years.

Make it Right for NEDs, By Design

NED Equity Plan (NEP) governance considerations are quite different to those that are applicable to other KMP roles (senior executives). Shareholders generally want to see that NEDs have the “skin in the game” that arises from ownership, but they generally do not want to see:

  • NEDs participating in the same equity plan as executives, which could compromise their independence,
  • NED equity subject to an exercise price below which the equity has not value (like an option for example) which could compromise their independence, or
  • Performance or service conditions (the latter often being considered a “golden handcuff” working against appropriate NED turnover) that could compromise NED independence.

In recent times, there has been increasing scrutiny, criticism, and indeed some prosecution, of directors that sell equity into the market while they hold the position of NED. Therefore, the only appropriate instrument for a NEP is likely to be Restricted Rights (either indeterminate or traditional) subject to disposal restrictions that apply while soever the position of NED is held by a Participant. Fortunately, this also produces significant financial benefits for NEDs in the form of long term tax deferral, and low tax on growth in the share price (compared to on-market purchases). It should be noted that insider trading restrictions do not apply to the issuing and exercise of Rights.

However, careful consideration needs to be given to issues such as when the grant is made, for what period, and what will happen if a NED ceases to hold office before the grant has been “earned”. Of course, all the usual considerations like change of control, demergers, delisting etc. need to also be considered.

The Data

The following tables outline an analysis of same-incumbent movements in Fixed Pay and Board Fees for ASX listed companies, over FY17 and FY18:


NEDs appear to have been unfairly treated given market movements and the increasing workload and risks that they are subjected to in fulfilling their roles in the current regulatory and stakeholder environment. An equity plan specifically designed for NEDs can restore balance, while moving the Company’s remuneration governance practices towards best-practice, and possibly improving AFL headroom at the same time.

An equity plan specifically designed for NEDs can restore balance, while moving the Company’s remuneration governance practices towards best-practice, and possibly improving AFL headroom at the same time
An equity plan specifically designed for NEDs can restore balance, while moving the Company’s remuneration governance practices towards best-practice, and possibly improving AFL headroom at the same time