For love or money: directorships and board fees
Companies everywhere are under scrutiny – whether it’s about how diverse they are, how sustainable they are or how well they have managed the Covid-19 pandemic. At least one consequence of these pressures is a drive for corporations to examine and adjust the makeup of their boards. Now, several trends are converging to make board membership accessible to a broader range of candidates, increasing the chances for business leaders who haven’t yet added a directorship to their CV.
While being career beneficial, board commitments can be time-consuming, and it is important to understand upfront how board fees are set and whether they can be negotiated. In this third part of AltoPartners’ series on the art of salary negotiations, we look at the issue of remuneration for board work.
Read the first two parts in the series: Could You Earn More and Salary Negotiations: It’s a (white) man’s game… or is it?
It’s not one-size-fits-all
Board fee structures vary across the world.
In the United States, according to Lauren Smith, managing director of Diversified Search Group / AltoPartners USA, board compensation is set by the board for everyone. It is included in the position description, with no negotiations involved. In other regions, there may be more flexibility. For example, Albert Froom, managing partner of Leaders Trust / AltoPartners the Netherlands, notes that in Europe, it is a complex matter because of the system of one-tier and two-tier board models, also known as the Rhineland and Anglo-Saxon models, with each model having its own fee structure and levels.
Regardless of the model, the fact remains: directors should be paid for their expertise. Claudia Hardy, Partner at Ezentia Leadership Group / AltoPartners Mexico, says that people starting out on boards might be more focused on securing the role, “but once the director has established their credentials as a board member, compensation becomes a differentiating factor, as larger companies tend to offer higher compensation packages to their directors.”
In that starting-out phase, though, there are other considerations that come into play. Karen Greenbaum, President and CEO of the Association of Executive Search Consultants (AESC) of which AltoPartners is a global member, advises people to consider all the variables. “Is this an organisation where you feel you can add value? Do you respect the rest of the board members? Is the time commitment realistic based on your other role(s) and activities?”
Other factors to consider include prestige, role in a committee, career exposure and the sector and type of company (i.e. foundation, family company, listed company, etc.). “All these things come into play when deciding whether to join a board,” adds Hardy.
How are board fees set?
Internationally acclaimed expert on board governance and board consultant to AltoPartners Australia Julie Garland-McLellan explains that in Australia, the board usually proposes a pool of fees (capped at a specific amount) to the shareholders at an AGM, which is then divided among the directors as the board sees fit. Each director is usually paid an equal annual amount, but some boards pay more to people who take on more demanding roles like deputy chair.
If possible, prospective candidates should find out how much was approved at the AGM and how close the current fees bring the board to the approved cap. “If the board is close to the cap, there is little room available for negotiation until the next AGM,” Garland-McLellan says. For a listed company, director fees will be disclosed in the annual report, but for unlisted companies, this information is more difficult to come by. And you don’t want to make a tactical error and enquire too soon.
Negotiating your fee – first steps
Many boards don’t like questions about board fees early in the process, and it is best to have the discussion later, advises Garland-McLellan. That does mean that a candidate might be quite far down the road before the financial information comes to light. Even then, the indirect approach remains advisable. “If it becomes obvious that the fees will be lower than you expect, it is best to broach the subject by asking how many hours or days per month you usually commit, rather than a discussion about the fees.”
This might seem a waste of time, but the process can be useful. Candidates can assess a board’s degree of professionalism during these talks. And what they learn can be a sign that they would be happier elsewhere. “It is more about understanding the board and its environment than about haggling for more money, even if more money is the result of your negotiations,” says Garland-McLellan.
If there is a search consultant involved, it is always best to have the fee discussion with them first. You may still need to discuss fees with the board but can do so after you know what their stance is.
What if you’re asked to sit on the board of the company you work for?
If you are an executive and are asked to take on a board role, make sure you understand why you are being asked to step up and what the company expects you will get out of it. Garland-McLellan cites an example: “One large multinational engineering firm uses a stint on the board as a development position to equip high potential staff with a wider view of the business than that they have gained in their own technical specialty. Most staff are not paid extra but see being on a board as personal and professional development, often followed by a promotion (and stepping down from the board).”
Tips for what to do (and what not to do) in negotiations
Set your boundaries: Be very clear on what you will accept and what will be a deal-breaking walk-away point. Find out what the board’s intentions are regarding increases in the aggregate fee pool; also ask about equity and other payments that may supplement the fee.
Be patient: Sometimes it may be a few months before the pool can be increased and you can start to receive the fees you requested during the selection process.
Clarify expectations: With commercial companies it is important to understand if there are any requirements or expectations that you will own shares. For non-profit or for-purpose companies, there may be expectations that you will donate in cash or in kind. Always ask, never assume.
Don’t take any expectations of non or low payment personally: It’s not about you; it is always about them. Garland-McLellan cites the example of a very senior director who was once asked to waive her fee, with the company chair saying: “There are plenty of women who would have taken the role for free to get the experience”. It later transpired that a major shareholder was aggrieved because a female family member had not been given the role even though she had offered to do it for free. The chair was simply reacting poorly to an uncomfortable situation.
Get it in writing: Don’t take a verbal assurance that there will be a future unspecified increase in fees. Always get written confirmation of what will be sought at an AGM, and when. Ask what will happen if the request is not approved by the shareholders. It is generally considered poor form to leave purely for financial reasons, so be as definite as possible about the timing and quantum of any increases to the fee pool and how they will be divided among directors.
Understanding is key: Every company and every board is unique, so make sure you understand who the other parties are before you decide whether to accept their offer, request an enhancement, or decline with good grace.