“If money go before, all ways do lie open.” But how much directors’ fee is enough?
A perennial question from SME owners wanting to pay directors’ fee during the reporting season of the financial year end at the back of a good bottom line, a happy problem.
Beside the need for the directors’ fee to be recommended by the Board (for public listed company, usually the remuneration committee) and to be approved by shareholders in AGM, the key question to answer is how much to pay.
We need to understand that payment of director fees is a remuneration to compensate the directors for acting as an officer of the Company and in performing their regulatory and governance functions, usually as a result of attending meetings related to the company’s business (e.g. directors’ meetings and general meetings). This is distinct from salaries that directors are entitled per their contract of service with the company, in their capacity as company employees.
Unlike the usual employment jobs, there are no readily available market remuneration relating to non-executive directors for companies especially for non-listed companies eg SME. Even the disclosure of remuneration practices by listed companies in Singapore remains weak across the board, with limited information disclosed.
The Singapore Report on Remuneration Practices: Avoiding the Apaycalypse published in 2018 that covers all 609 SGX listed companies with financial years ending between April 2016 and March 2017 provides information on remuneration amounts for key executives and board members which may be useful to understand what perhaps may be a reasonable guidance. It was reported that on a per non-executive director (NED) basis, the median fee was assessed to be $53k.
A separate Hay Group report in 2015, reported that NEDs in 229 listed companies on the Singapore Exchange earned an average of $60k in 2015 (2014: $56k). Specifically, the directors for medium-sized companies (market capitalisation >$500million but < $3 billion), large-sized companies (market capitalisation > $3 billion) and small-sized companies (market capitalisation <$500 million) earned an average of $75k (2014: $65k), $142k (2014: $123k) and $53k (2014: $50k) respectively.
So it seems a $53k to $60k is perhaps a reasonable average sum for each NED. This amount is likely to be lower given the less stringent regulatory and governance responsibilities that the NED for SME would have to shoulder as well as the lesser complexity associated both with the scope, geographical distribution and volume of the SME business.
It is easier to tell an elephant when you see one versus trying to describe the creature. In this context, it is advisable that for whatever amount that a SME owner would like to take the maxim “If money go before, all ways do lie open” to its true intent, any amount excessive of the normal is likely to raise the eyebrows of any persons especially the regulators. Whatever it is (even if it is lower), you need to ensure the directors’ fee is commensurate with the official duties and responsibilities that the directors are holding for the past year taking into consideration amongst others at a minimal, the role of the Board or individual directors (chairman, lead or just a NED), the nature of the specific director’s duty (existence of any general board, audit, remuneration committee) and the number and frequency of meetings. It may be greyer than grey whether an amount lower than the normal is reasonable but it is definitely less grey when one sees an excessively higher amount.
Some useful information from the Hay Group 2015 report: Components of Director fee include: 1 + 2 + 3 + 4 + 5
1. Basic retainer as Board Chairman: as board $46,200 to 730,000 (Median = $110,000), as Board Member:
$34,200 to $80,000 (Median = $45,000)
2. As Committee Chairman:$6,775 to $60,000. As Committee member: $4,075 to $39,000 with certain committee eg risk & audit paid more.
3. Meeting fee, usually $1,000 to $5,000 per meeting. Median = $2,000 per board meeting, $1,500 per committee meeting.
4. Benefits & allowances are typically few and low in amounts. Median accounts for 4 per cent of total director’s fee.
5. Share-based remuneration given by < 10 per cent of companies offer this: Median value: $56,000.