Non-Executive Director Remuneration 11 February, 2008
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Advice for companies on remunerating NEDs
Many companies are concerned about the financial burden of taking on a Non-Executive Director or Chairman and this article discusses a few of the options that are available. One of the most important things to look for in a non-executive Board member is that they really believe in your plans and genuinely want to help you realise them. If this is the case then alternative forms of remuneration will be open for discussion. On the other hand, you will also have to prove your committment to a Non-Executive Director and if you can’t do that with your passion about the business and your track record, a non-executive Board member may well insist on receiving payment purely to focus your mind on the value that they will bring.
Deferred Payment
The simplist way to ensure that taking on the right person does not adversely affect your cash flow is to defer their payment until cash flow allows. This may be on an ad hoc basis, agreed each month. It may be rby prior agreement and related to income or profit. It may be that you expect to be in a good cash position in six or twelve months or you may link it to a milestone such as a winning your first contract or raising additional funds. Remember, if you’re deferring payment then you have to catch up at some point so ensure that this is built into you cash flow predictions and budgets.
Equity
Many Non-Executive Directors and Chairmen are more interested in partaking in the longer-term capital growth in a business than they are in receiving cash fees as they go along. If this is the case, you can open a discussion about them taking part, or all, of their fee in shares. The ususal problems arise; you may find it difficult to agree on a valuation of your business or of the time spent by your non-executive Board member and issues may also arise over the shareholders’ agreement. Nonetheless, this is usually an option well worth discussing.
Options
An alternative to offering equity, particularly if you are struggling to agree on valuations, is to offer options instead. You will usually pay your Non-Executive Director or Chairman but at a discounted rate. You will also grant them the right to buy shares (remember, buy shares), again at a discounted rate. You can link the number of options they are granted to the amount of time they serve with you so that they build their potential shareholding over time. That way, you are committing to them by paying them and granting options, they are committing to you by taking a reduced fee and if, over time, the relationship is working well then they have the opportunity to invest in your business at a rate which is attractive to you both.
No Fee
If cash flow is very poor (and it will have to be very poor) and you have a Non-Executive Director or Chairman who really believes in you and your business, then you can always suggest that they work with you for a period without any fee or commitment. Good luck with that!
If you would like to discuss these options or any others then do please give us a call.
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