The fees paid to directors are usually set at the prescribed rates on either an annual basis, hourly rate or per meeting, and this varies from Industry to Industry. For example, financial services sector, retail sector, energy sector etc. In determining the compensation, companies should consider;
The need to attract qualified and outstanding people, who are available, committed and willing to contribute to the company. In addition such compensation should be such that the qualified and competent people can be recruited and retained.
The legal duties and responsibilities carried by directors.
The work-load and time required to satisfactorily discharge the responsibilities and duties of the director in a given organisation.
It is also a common practice for organisations to take into consideration pay components that may include;
Annual cash retainers and meeting fees for normal and special board service.
Additional compensation for chairing the board or serving as a lead director or serving in specific committees like the Audit Committee.
Equity compensation in the form of stock options or full-value stock awards.
It is recommended that a committee of the board should be tasked to review directors’ remuneration and make a recommendation to the board. In doing this the committee should take into account the level of fees charged by various professionals like lawyers, accountants, management consultants etc. and also consider the regulatory requirements and guidelines as set by various authorities. For example, in the public sector in Kenya, allowances are paid at prescribed rates as set by the relevant authorities (eg The Salaries and Remuneration Commission).
As an example the following formula may help:
N= Number of board meeting /year e.g. 8
D= Average duration of each meeting e.g. 2 hrs
K= preparation time; generally considered to take twice as long as the duration of the meeting (2 x 2) = 4 Hrs
Y= Hourly rate paid to an accountant. Approx. US$ 40/hr= Kshs 3,600
Hence annual remuneration= N x [D+ K] x Y; Equals 8 x [2+4] x 3,600 =172,800 / annum
This annual rate can then be divided by the number of meetings that directors are expected to attend throughout the year and then use it as the standard rate per meeting.
Note that this is just a guide, and the compensation varies from one organization to another.
Centre for Corporate Governance (2012); Corporate Governance Training Manual for Boards of Directors; Longhorn Kenya Ltd.
REMUNERATION COMMITTEE FORUM; http://www.ey.com/Publication/vwLUAssets/EY-IoD-Remuneration-Committee-Paper/$FILE/EY-IoD-Remuneration-Committee-Paper.pdf