CEO vs. Board Pay: is the Balance Right?

Although the two strikes rule is mainly targeted at executive pay, Non-Executive Director remuneration still receives attention.

Egan Associates analysis has shown that companies in the ASX 100 have on average held almost two less Board meetings in the 2012 financial year than three years earlier. However, anecdotally, the amount of preparation required for meetings has increased, as has the red tape Boards have to navigate. A recently released Director Sentiment Index, conducted by Ipsos Australia for the Australian Institute of Company Directors, surveyed 540 Directors: more than 60% said the level of red tape had risen over the past year. They said red tape compliance took up 26% of their Board time commitment.

Meanwhile, major legal judgments against Directors such as the Centro and James Hardie decisions have put pressure on Boards to have a thorough understanding of what is going on in their business, as they cannot delegate their duty of oversight. 40% of surveyed Directors believed these judgments negatively affected their business decision making and willingness to continue on a Board, while over 50% said they had reduced their desire to accept new Board appointments.

So, are Board Directors being paid enough to compensate them for their responsibilities?

The average size of an ASX 100 Board is approximately seven non-executive members (including the Chair), on an average fee of $188,956 for Directors and $426,371 for Chairs. We estimate that ASX 100 Directors would spend approximately 30 days a year on their duties, and Chairs up to two-and-a-half times that, or 75 days. In total, therefore, the Board as a whole would work approximately 255 days a year (2550 hours assuming a 10-hour day) at an average annual cost of $1,560,107.

Now let’s look at the CEO. The average fixed pay or Total Employment Cost (TEC) for top 100 CEOs as disclosed in the last reporting year is $1,644,242 (interestingly, approximately equal to the entire Board’s fees). The average total annual remuneration (TAR, which is TEC plus annual incentive) is $2,803,719, and the maximum additional opportunity to be gained from their most recent LTI grant is $2,678,485. A CEO works around 60 to 80 hours a week over 48 weeks of the year, amounting to 2880 to 3840 hours. The halfway point, 3360 hours, represents approximately a third more hours worked a year than the Board.

If the Board as a whole worked CEO hours, it would be compensated $2,055,670, above CEO TEC, but approximately 25% below CEO TAR and only 40% of a CEO’s total opportunity, including their latest LTI opportunity.

Board versus CEO remuneration

If the company performs poorly and the CEO receives no annual incentive or LTI award, the CEO would be paid only TEC, equivalent to the entire Board’s fee. If the company reaches stretch performance such that the CEO receives both annual incentive and all their LTI opportunity, they would receive over 250% of the entire Board’s fee. This would appear to indicate that a Board working a CEO’s hours is paid a premium to a CEO’s TEC, but without the potential upside represented by the annual incentive and long term incentive opportunity.

Considering this, we raise the question: given that Board remuneration secures the efforts of seven highly experienced personnel, while CEO remuneration secures only one (although one who bears the brunt of day-to-day management decisions and is permanently on call), are Boards paid correctly in relation to the CEO? If not, is CEO pay too high or Board pay too low?

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