Non-executive directors' pay: how much is enough?

In recent years, there has been a rise in the number of non-executive directors needed in the NHS, as well as a change in what is expected of them. This has prompted plenty of debate - not all of it well informed - about how much NEDs should be paid. So is there a rational basis for setting non-executives' fees, and if so how high should they be?

The private sector

Fee setting for non-executive directors of UK listed companies follows these broadly consistent considerations:

• amount: typically related to the company's size and complexity. Some fees tend to be linked to executive directors' pay, pro rata;

• fixing: fees are fixed for at least a year in advance;

• relationship to time spent: set by reference to expected time commitment, not actual time spent;

• additional responsibilities: extra amounts are often paid for chairing standing board committees (such as audit, remuneration and other regulatory committees);

• fees for special roles: larger fees are paid for those undertaking special board roles, such as chairman, senior independent director and deputy chairman (less common - nowadays often replaced by the senior independent director);

• forms of payment: usually cash, but sometimes part company shares (the Combined Code on Corporate Governance strongly discourages incentives such as bonuses or share options);

• formal voting process: agreed and voted on by the board.

This consistent approach is a result of the "unitary" board structure enshrined in UK company law and the corporate governance guidance provided by the Combined Code.

Basic fees for non-executives of large UK listed companies range from£50,000-60,000 a year at the bottom of the FTSE 100 to£75,000-100,000 at the top. Fees at smaller listed companies tend to fall away quickly. Basic fees of£25,000-35,000 are typical in the lower half of the FTSE mid 250.

The public sector

A wide range of public bodies use non-executives, but their requirements are varied. At the most commercial end of the spectrum, government-owned companies have a similar approach to the private sector. Their NEDs are as accountable as those in a listed company and they pay a market rate to get the expertise and the time required for the job. At the other end, public bodies - such as museums, galleries and universities - can and do expect experienced and senior people to give a substantial time commitment for little or no recompense.

NHS non-executives fall somewhere between these extremes. The accountabilities of NEDs in foundation trusts are similar to those on a listed company board. A system of payments, set by the governors, is evolving that takes account of the size of the trust and the responsibilities of the individual. Although many still only differentiate between the chair and the other NEDs, there is growing acceptance of the need to pay more to the audit committee chair and to a senior independent director.

While NEDs in strategic health authorities, primary care trusts and other non-foundation trusts have a substantial role, they do not have quite the same personal accountability or freedoms as their counterparts in FTs. Their rates are set by the Department of Health based on traditions, generally at a lower level than in FTs.

Is there a case for change?

The emergence of foundation trusts and the commercial public sector market has caused a lot of debate. Those in the more directly managed parts of the NHS feel left behind and short-changed when looking at the sums involved.

It may be that NED fee rates should be higher in some parts of the health service, but to judge the case in full the following factors must be considered:

• nature of the organisation: its size, reach and strategic intent;

• level of accountability: of the NEDs for the performance of the organisation;

• details of the role: the time commitment and other variations (for example, among public bodies, some boards have an overall governance role and others, in addition, approve grants or make decisions on casework);

• additional responsibilities: of the NED;

• market rate: required to attract people with the necessary experience. Trusts achieving foundation status typically change some NEDs, and government agencies taking on greater commercial freedom also require a different kind of input from their NEDs. The time commitment may be the same but the people cost more;

• compensation levels needed to attract people from diverse backgrounds: it is important to have a good balance of men and women and of different age and ethnic groups. The greatest concern of low fees is that only the wealthy or retired can afford to participate.

The public sector market for NEDs is evolving. But if fees are based on these six factors, there need be no mystery - they will be just big enough.