Shareholder advisers and high pay campaigners demand transparency as some board members of the UK’s largest listed financial firms were revealed to have received a near-80% pay raise since 2009.
Reports revealed that the three top-earning non-executive directors (NEDs) from among the 17 FTSE 100’s financial firms rose by 79%. It was initially at £90,700 in 2009, before it rose to £162,000 in 2019. The increase in earnings was apparent, despite their part-time roles.
The Highest Earners in the UK
The top earners were board members who oversee the UK’s largest banks, insurance, and investment firms. It was topped by a board member from the Lloyds Banking Group (whose salary rose by 257%). A NED for the London Stock Exchange Group (who saw a 219% raise) follows next, and then the one from Hargreaves Lansdown (whose fees jumped by 170%).
Experts say that the salary hike is meant to inspire NEDs to take more significant responsibility and keep closer tabs on operations. However, it is not easy to identify or confirm a director’s workload beyond what’s disclosed in annual reports. Reports suggested that even the highest-paid NEDs only attend about 26 meetings in 2019, compared to 21 meetings in 2009. Even the busiest ones only sat through 48 meetings in the past year.
There is also no precedent for docking the pay of UK NEDs for misconduct or corporate failures. However, Aviva, the insurance company, considers a clawback of the director’s salary after an announcement to cancel its preference shares led to a row.
The Call for Transparent Income Distribution
High Pay Center think-tank and influential shareholder adviser PIRC had started a rally calling for transparency regarding the detailed information about top earners like NEDs. Their rising fees flew under the radar for the past decade. Now the hefty pay packages are taking a bad rap, but the High Pay Center says some board members are already earning more than 99% of the UK workforce while working only a fraction of the time.
Francesco Navarrini, PIRC’s head of research, said that to balance out the high executive pay, NEDs should offer the same rigor on demonstrable “benchmarking in terms of fees, workload and meetings, and items discussed.” This should also improve the pay ratio between the NEDs and the rank-and-file employees without a further pay increase.
The NEDs at financial firms may face greater pressure with the proposed fee transparency, since it will reveal that they are earning twice as much as their average UK peers from the UK’s 150 largest listed firms.
Luke Hildyard, director of the High Pay Center think-tank, said that the lucrative compensation for part-time work creates a bad public perception of the position and “attracts people to the roles for the wrong reasons.” He thinks there should be more detailed disclosure requirements for businesses that spend over six figures on their directors’ salary.
Typically, board members get a base pay, but they earn extra money sitting on committees that decide executive pays and oversee financial reporting and governance. Both have risen, from the base fees (rising by nearly 20% to £75,000) to committee membership (which increased by 55% in 2019) and committee chairmanship (pocketing over 71%) in fees.
New Top Earners in the UK
Not even one of the financial company NEDs from 2009 is still in their post due to a nine-year-limit, but many people on the financial services board have had their fees doubled or tripled during their tenure. HSBC’s board member Heidi Miller (with a 204% pay rise over four years), NatWest Market’s Frank Dangeard (whose pay rose by 91% since taking the chairmanship in 2017).
While some NEDs included in the report hold additional non-executive roles like Dangeard and Miller, not everyone will disclose their salary details. This alone strengthens the demand for transparency and standards relating to NED fees.
The Scope of Work of NEDs in the UK
Jenni Hibbert, a global managing partner at Heidrick and Struggles, said that the directors put more time than reported. According to her, NEDs take on big responsibilities. For complex FTSE 100 financial firms, they need to put in about 80 to 100 days every year, including time spent for meetings.
“We have to remember that being a NED is a huge responsibility – the Companies Act does not differentiate between an executive and a non-executive director when it comes to fiduciary responsibilities,” Hibbert said. That said, NEDs need to exercise the same caution and care as an executive does, and Hibbert shared that “it takes many hours of reading, investigating and getting under the skin of things, to do their job well.”
Nevertheless, they still only work about 250 working days a year while earning a lot more than most employees. Hildyard says, “Many financial services firms paying six-figure sums to their NEDs will also have low-paid staff in branches, call centers or administrative roles struggling to make ends meet.”
“The UK should be debating what we could do more generally to achieve a more even income distribution,” he added.