Non executive remuneration
Not employees of the company although are usually treated as such for tax purposes
Receive a fee for their services as an officer of the company, not a salary
Do not have a service contract with the company
Terms of their appointment are set out in a simple letter of appointment.
If they are removed there is no breach of contract and no compensation will usually be payable
Procedure for setting NED fees
The Code provides that the remuneration of NEDs should be determined in accordance with the AoA or by the board. It makes no specific provision allowing the board to delegate this matter to a committee
AoA commonly used to place an overall cap on the fees that could be paid to NEDs. Subject to this cap, their fees could be determined by the board as a whole
The directors would need to obtain shareholder approval in order to increase the overall cap stated in the articles
Very few companies have such provisions in their articles any more. Most listed company articles simply allow the board to determine the fees of NEDs
It would not be appropriate for the remuneration committee to be involved in this process as this would mean that some of the NEDs were involved in setting their own remuneration. In practice, the chair and/or the executives will usually take the lead on proposing the fees probably after taking advice from the company's remuneration consultants
The Code provides that the remuneration of the chair, whether executive or non-executive should be determined by the remuneration committee. However it allows the chair to serve on the remuneration committee if considered independent on appointment. This may appear to mean that a non-executive chair can be involved in setting their own remuneration, however the Code states that no director should be involved in deciding their own remuneration outcome would still need to be respected. A non-executive chair who serves on the remuneration committee would need to recuse themselves when the committee is deciding their own remuneration
Levels of NED fees
Under the Code, levels of remuneration for the chair and all NEDs should reflect the time commitment and responsibilities of the role
Their remuneration should not include share options or other performance related elemented
Higgs Review endorsed the view that payment of part of a NEDs remuneration in shares can be a useful and legitimate way of aligning their interests with those of shareholders
NEDs fees have risen appreciably in the last 20 years. Most of the increase can be attributed to the additional responsibilities and time commitments involved under the Code.
Additional fees
Some NEDs may received other forms of remuneration or rewards from the company in addition to their basic fees
Although this is not prohibited, it will comprise their independence under the Code which requires companies to assess whether they
Have received or receive additional remuneration from the company apart from a directors fee
Partipcate in the company's share option or performance related pay scheme
Are a member of the company's pension scheme
Engaging a NED to provide consultant services could entail having to recruit an additional independent NED, unless the NED was already considered to not be independent
Performance related awards for NEDs
The Code states that the remuneration of NEDs should not include share options or other performance related elements
It is not considered appropriate for the pay of NEDs to be based on the company's performance because
This would involve a conflict of interest for those serving on the remuneration committee who are responsible for designing these performance schemes
It would have the effect of algingint eh interests of NEDs more closely with those of the executive directors (rather than the shareholders) and make them more liable to allow the company to take bigger risks
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