Taking the heat out of director fee discussions

Cedreece Tamagushiku

Director fees can produce some of the most uncomfortable conversations around a board table. The people deciding what constitutes fair remuneration are often the same people receiving it, while every increase must be weighed against the expectations of shareholders, ratepayers, members or the community.

Without independent evidence, the discussion can become a contest of personal views. 

“You’ve got people saying, ‘Your opinion is that, my opinion is this’, and no one is necessarily right or wrong,” says Cedreece Tamagushiku, general manager finance and business services at Ōtautahi Community Housing Trust (OCHT). “It becomes quite hard to land on a position that’s defensible.”

OCHT has made director fee benchmarking part of its annual board work plan. Each May, the trust reviews its fees against independent market data and considers whether any change is warranted.

The process does not assume fees will increase. It gives the board a consistent basis for deciding – and explaining – where they should sit. As a charitable trust and public benefit entity, OCHT receives much of its income from government and the people it houses, some of whom are among the community’s most vulnerable.

“It’s really important that we’re transparent about what we do and the decisions we’re trusted with,” Tamagushiku says. “We need something tangible, with some integrity underlying it, that we can point to and make decisions from – rather than saying, ‘We think we should be paid this or that’.” 

A defensible starting point

Director fee discussions carry an inherent tension. Boards must recognise the workload, expertise and liability involved in a governance role, while being able to explain why the resulting fee is reasonable.

That tension is particularly visible in charitable, publicly owned and membership-based organisations, says Jo Birdsall, IoD Senior Advisor – Remuneration and Board Services. 

“Shareholders want to know it’s not just a group of people sitting around the table deciding what they should be paid,” she says. “With councils, it’s ratepayers’ money, so they have to be accountable for it.”

Independent benchmarking changes the character of the discussion. Rather than beginning with what individual directors believe the role is worth, the board can compare its fees with organisations of a similar type, scale and complexity.

Birdsall says the objective is fairness, not higher fees.

“It takes it away from people feeling they’re working hard and don’t get paid enough, or assuming the organisation must be underpaying. You can see where you sit in the market.”

The comparison is rarely as simple as matching one organisation with another in the same industry. Regulation, operating risk, scale, stakeholder expectations and the demands placed on directors can vary considerably.

“That’s where you need to understand the organisation rather than just saying, ‘Everyone in this industry gets this amount,’” Birdsall says.

A regular place on the work plan

OCHT has used benchmarking data for about five years. The review now appears on the board work plan at the same time each year, so directors know when the discussion is coming.

They consider not-for-profit data, the difference between director and chair fees, and whether OCHT sits near the lower quartile, median or upper quartile of the market. They also compare typical time commitments with OCHT’s meeting schedule, work plan and responsibilities.

“We’re not just taking the data and saying, ‘We’ll use the median’,” Tamagushiku says. “We look at what that median corresponds to in terms of the board’s work plan and whether that broadly aligns with ours.”

Independent benchmarking gives directors a common reference point. Instead of debating what individuals believe the role is worth, the board can assess its fees against comparable organisations and explain the basis for its decision.

Avoiding the catch-up increase

The IoD generally recommends a comprehensive fee review at least every three years. Some organisations, including OCHT and a number of publicly owned ports and utility companies, check their position annually.

The advantage of regular review is not that fees must move each year. It is that boards are less likely to discover, after years of inattention, that their remuneration has fallen substantially behind the market.

“You avoid that giant leap where you suddenly realise you haven’t done anything for 10 years and need to add a significant amount to become market comparable,” Birdsall says.

Large catch-up increases can be difficult to explain, even when the evidence supports them. Smaller, considered adjustments – or a documented decision to make no adjustment – are easier to defend when the board has reviewed its position consistently.

OCHT has considered moving to a two- or three-year cycle, but has retained its annual process.

“We look at employee remuneration and other measures annually, so it feels consistent to review this regularly as well,” Tamagushiku says. “It avoids operating below the market and then getting a big shock.”

The same discipline helps when trustee remuneration appears in the trust’s financial statements. Tamagushiku applies a “front-page test”: could OCHT explain the decision if it became the focus of public attention, particularly when households and tenants were under pressure?

“It keeps you honest,” he says. “You need to be able to explain where you’ve landed.”

Benchmarking does not eliminate disagreement. OCHT’s trustees bring different professional backgrounds and perspectives to the table, and Tamagushiku says remuneration remains one of the board’s more robust discussions.

The evidence gives them somewhere credible to begin.

Birdsall sees remuneration reviews as part of the same cycle as board evaluations and skills matrix reviews. Board composition changes, organisational demands shift and the expertise required around the table does not remain static.

“You need to be sure you’re getting the right people, paying an appropriate amount and understanding what might be missing,” she says.

Regular benchmarking will not make director remuneration uncontroversial. It can, however, turn an occasional, emotionally charged decision into a routine governance process – including when the evidence supports leaving the fees exactly where they are. 

 Our expertise

Jo Birdsall, Senior Advisor – Remuneration and Board Services

The IoD’s director fee reviews are led by Jo Birdsall, Senior Advisor – Remuneration and Board Services. Each review draws on independent market data, applies a consistent methodology and is peer reviewed. The work is informed by the IoD’s Four Pillars of Governance Best Practice. 

Birdsall has managed the IoD’s Director Remuneration Service since 2022, providing specialised advice and insight on director time commitments, responsibilities and remuneration practices across a wide range of organisations. Her work spans NZX-listed companies, iwi organisations, Crown entities, not-for-profits and charities.

To discuss your board’s remuneration approach or the IoD’s director fee review services, contact Birdsall on 021 193 1208 or at  jo.birdsall@iod.org.nz.