Code User Group Blog: April 2024 Board roles

During this month’s user group we focused on the nature of board roles and how they are remunerated.

As a starting point we established that the board typically consists of:

• The Chairman

• CEO / MD

• CFO

• CTO (if a tech focused company)

• Non-executive directors

• Independent directors

As a reminder the Chairman and non-executive directors whilst not paid significant sums, will have been appointed based on their current / past experience and as such might have significant earnings from past roles. No bonuses or LTRs are typically paid to these individuals.

The Chairman and Non-executive directors are not involved in the operational decisions of the company and sit on the board to provide objective guidance and insight. They perhaps attend 10-12 meetings per year maximum.

The difference between non-executive directors and independent directors is that independent directors do not own shares in the business.

The best paid board roles are the CEO/MD and the CFO. Their pay is made up of:

• Base pay – paid monthly

• Bonus (split roughly 50/50 in terms of cash and stock awards) – paid at the year end

• Long term incentive plans (share awards / options with a required holding period) – awarded at the year end.

For private companies where share awards are not possible, we do see similar overall pay being granted, with all bonuses paid in cash.

Bonuses are based on the achievement of performance targets (financial and non-financial) which can be monitored / tracked when a company issues an interim report. If the company is performing well (established by reviewing the interim report), it is more likely annual performance targets will be met and as such bonus payments made.

We discussed that for most base salaries are ‘allocated’ so cash bonus payments (whilst also being liquid) are also more likely to be available for gifting.

We noted the impact that tax has and for many board members operating in large companies and they will lose circa 50% of their income to tax.

Discussions then moved onto modifiers and role selection. Some key tips we outlined include:
When choosing the sector it is the activity of the business which is the key driver such as someone working in a technology based role for a vehicle manufacturer  - it is the vehicle manufacturing sector that should be selected.

• Sector informs pay levels more than role.

• Management expertise: can positively those who have been in role for longer / have an exceptional track record and lower weightings for shorter tenures

• High company growth is where there is clear evidence the company is performing better than the sector average.

• The use of modifiers is subjective and is more of an art and needs the expertise of the researcher.   Standard is recommended where you are unsure but you could be leaving money on the table if not willing to use modifiers.

As a reminder there is no user group in May.

Thanks,
Jon