Are Non-Executive Directors entitled to extraordinary pay as a result of the pandemic? This is the question which many Boards will be grappling with as COVID-19 places greater demands on key leadership time and expertise. All too often, Non-Executive Directors (NEDs) are required to go above and beyond the terms of their engagement without being adequately compensated.
This issue is further complicated during times of crisis when Non-Executive Directors are expected to spend long hours formulating operational and financial action plans-while simultaneously facing public scrutiny over Board and executive pay.
The social pressure to cut corporate pay has been evidenced in Australia either as a show of solidarity and financial leadership or purely for business survival. Locally, we’ve seen companies such as Panoramic Resources Limited and EcoGraf Limited whose NEDs have either reduced or agreed to waive their fees, as well as high-profile brands like Qantas waiving all NED fees by 30%.
Whilst efforts to conserve funds for bridging short-term cash flows take priority over skilled recruitment, it should also be considered that a competitive level of pay is a commercial driver when seeking to attract and retain the best people and can also play a role in assuring that the affairs of the company are in safe and capable hands.
That being said, NEDs are limited to the number of Boards they can 'sit' on, and it, therefore, stands to reason that eventually they must look to ensure they receive fair compensation for their skills. Therefore we should not necessarily rush to applaud Board fee cuts during a crisis but rather understand whether there is a plan is in place to ‘reimburse’ deserving NEDs for their efforts when Company fortunes return.
The absence of required skills increases the vulnerability of small-cap companies in particular when market conditions are tough and therefore the motivation and retention of key NEDs should be high on the business agenda.
Expecting NEDs to work over and above the terms of their engagement is not only unethical but perpetuates the falsehood that those ‘pocketing fees’ are somehow ‘unworthy’ and such fees are not warranted. I encourage companies to 'kickback' on such rhetoric views and support the value their boards are adding in these times.
This view is endorsed by the Australian Institute of Company Directors (AICD), who believe that where substantial extra time and effort is required of directors in response to particular corporate situations or events, and this commitment is reasonably considered to be extraordinary, it is appropriate that such directors be entitled to additional remuneration.
Affordability aside, COVID-19 supports such a situation.
What constitutes ‘extraordinary work’?
Boards set annual director fees on the basis it is business as usual. This may represent several days per month with the acknowledgment that, from time to time there may be considerable additional demands ‘beyond reasonable working hours’ for which NEDs require additional compensation.
According to the AICD, examples of additional responsibilities include “involvement in ad hoc due diligence procedures, such as sitting on a specially convened due diligence committees,” or “work on merger and acquisition-related activities where the proper discharge of directors' duties may require substantial involvement outside ordinary board and committee meetings."
How do you determine the extraordinary pay amount?
Once it is established that extraordinary pay is required, there are several ways a Board or Remuneration Committee can go about distributing it. It might be implemented through an hourly rate or additional lump sum for work completed outside contractual agreements and this includes non-performance equity-based awards. BDO Remuneration and Reward have a process to assist Boards with this determination.
Key questions to consider include:
In contemplating whether NEDs should receive extraordinary pay, there are a number of questions the Board or Remuneration Committee should ask:
- Has there been an extraordinary event?
- As a result, is the NED required to work a significant number of hours beyond what their contract stipulates? If so, why so?
- Is the company in a financial position to provide extraordinary pay now? If not, what can be implemented to ensure that deserving NEDs are retained and motivated?