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boardmembers need to be paid

Meranth Governance & Compliance News compensation. The final school of thought is
that only NEDs should be paid compensation.

The board of directors of a company can
March 2017
appoint any number of its members as an

BOARD REMUNERATION

Introduction

Board remuneration or directors’ pay has Another is that only board members need to
always been at the forefront of corporate be paid compensation. The final school of
governance due to its importance. A thought is that only NEDs should be paid
company’s board consists of both Executive compensation.
Directors (ED), who are employees of a
ED, with terms as they may determine and
company, and Non-Executive Directors (NED)
may also revoke such an appointment. Such
who are not employees but engaged by way
an ED may hold any senior management
of a services agreement or letter of
position in a company but cannot also
appointment.
perform the role of auditor for that same
Shareholders usually delegate authority, via organisation. An ED is involved in the day to
the Regulations, to the board of directors to day operations of the company. As such, this
set remuneration levels. Many boards then office may be remunerated by way of salary,
delegate this authority to a dedicated commission, share of profits, participation in
remuneration committee, comprising only pension and retirement schemes, as the
NEDs, which is responsible for setting Board may determine. In other words, an ED
remuneration for all EDs and the Chair. A receives payment for his employment for a
significant proportion of EDs remuneration specific role which may include acting as a
should be structured such that rewards are director.
linked to corporate and individual
A NED is not an employee of the company. A
performance. Furthermore, on the
NED is not part of the executive team and
recommendation of the Chair and the MD or
therefore does not engage in the day-to-day
CEO, the Board sets the remuneration of the
management of a company. They are rather
NEDs. Board remuneration can be defined as
involved in the policy making and planning
payment or compensation received for
exercises. This is to maintain their
services in respect of NEDs or in respect of
independence of a company. A side benefit
EDs employment and includes base salary,
is that not being an employee enables a NED
bonuses and any other economic benefits
to hold more than one appointment. This
that an executive receives during
enables the NED to gain a wider perspective
employment. Moreover, board remuneration
and bring that view to bear when considering
consists of fees and sitting allowances.
the challenges facing the company. NEDs are
These are awarded to members of the board
given a service agreement or letter of
for their skills, knowledge, expertise and
appointment which governs the terms of
experience that they bring to the company, to
their engagement as a director. Therefore,
help it achieve its mission and vision.
they receive ‘director fees’ for performing the
There are many schools of thought regarding role of a director for their skills, expertise,
the payment of compensation to attendees of knowledge and experience brought to the
board meetings which often includes senior company. These fees however, are taxable.
management. This begs the question whether
all attendees should be compensated. Sitting Allowance

One school of thought is that all attendees Sitting allowances are amounts paid to
should be paid compensation. defray out of pocket expenses incurred on
behalf of a company. It would cover the Some are of the view that sitting allowances
travelling and other expenses properly are not a useful incentive, as it rewards
incurred in attending and returning from people for simply attending meetings and
meetings of the board of directors; any may not stimulate debate. However, sitting
committee of directors; general meetings of allowances should be used as a tool to
the company; or otherwise in connection encourage active participation in meetings.
with the business of the company. The assessment criteria used in board
evaluations should include the effectiveness
Sitting allowances can be used as an of its members in terms of attendance and
incentive to encourage directors to attend participation. This action should give the
meetings regularly and actively participate in organisation insights into how efficient
the running and oversight of the company. sitting allowances are being deployed to
Regarding the schools of thought and sitting achieve the right impact.
allowances, it can be said that an ED which Conflict of Interest
would include a Managing Director (UK) or
Chief Executive Officer (USA), who is Boards should govern, and management
generally an employee of the company, should manage. Board members are stewards
should not receive board fees nor sitting appointed by shareholders to maximise
allowances. The reason is that as part of their profit and act in the interests of the
duties, they report on the operations of the company. Effective boards work on the
company to the board of directors at board premise that accountability can be delegated
meetings, which in most cases are held in the but responsibility cannot.
board or conference room of the company.
As such, there is no cost to be covered. Allowances paid each time a board sits, is
However, in a case where the meeting is held sometimes abused as members of the Board
outside of the normal place of meetings, use this incentive as a means of making more
companies would usually pay compensation money by having more than necessary
to cover the travel to and from the venue in number of meetings.
accordance with any employee travel policy. It is sometimes justifiable to have more
Nonetheless, should the company consider frequent meetings when there is direct
that the time the ED spends at board challenge to the organisation’s survival. It
meetings is outside the scope of their becomes important that the board meets
substantive portfolio and requires frequently enough to determine effective
remuneration, then this may be acceptable. policies and direction, to weather the storm.
So the argument for NEDs and the payment As a rule of thumb, boards should meet once
of sitting allowances would hold as they have a quarter to consider any topical issues as
to travel from their usual place of business well as any standing agenda items. The first
to attend board meetings. quarter would be to discuss the vision for the
year; second quarter to perform a general
It is unusual for senior management who are horizon scanning of its industry to assess
not directors but attend board and competitive advantage; quarter three to
committee meetings to receive sitting consider budgets for the subsequent year;
allowances since their travel to the meeting
and quarter four to review operations,
place is their usual place of work. However,
the main argument here is that they are paid evaluations and appraisals for the year. In
a salary and other benefits in kind and the addition to these any other agenda items
requirement to attend board meetings, may be added. The need for additional
committee meeting and management meetings should therefore be considered
meetings is all part of their job and as such carefully, appraised and held when deemed
no additional sums should be paid to them. necessary. This will limit the number of
Their role requires them to present their
sittings and prevent the notion of using
various reports to the Board and therefore
they should not get paid extra to do their meetings as a means of increasing sitting
job. allowances.
Conclusion

Board meetings are a very important element Meranth Nugget: Sitting allowances can be
of governance of any organisation. The used as an incentive to encourage directors
setting up of a board requires that its to attend meetings regularly and perform
participants are appropriately remunerated. their oversight duties effectively.
The compensation of board members should
reflect the skills, knowledge and expertise
they bring to the company and the ability of
the company to pay out these
compensations. Boards should therefore
ensure that they serve the interests of the
shareholders and stakeholders in general.
The Board should not fall into the trap of
convening excessive meetings at the
detriment of the organisation. Getting this
right affects the whole organisation in a
positive manner!

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