The financial crisis has put significant extra pressure on non-executive directors, with average time spent on the job rising by 4 days this year to an average 24 days. The extra time commitment has been driven by risk and regulatory requirements combined with greater business challenges, according to PwC’s 2010 non-executive director report.

Given the increased time demands and reputational risk, nearly half (45%) of non-executives now consider their fees too low and that a 25% increase would be appropriate. The average (median) fee increase among the 53 FTSE 100 companies that increased pay in 2010 was 11%, taking the average pay for a non-executive director in the FTSE 100 to £57,000.

Sean O’ Hare, remuneration partner at PwC, says “Non-executive directors recognise that it would be insensitive to push for pay hikes at a time when companies are under huge financial pressure. Indeed 60% of the non-executives surveyed do not envisage a fee increase over the next financial year. But pent up demand is likely to feed through to pay rises over the next two to three years.

"To some extent pay will always remain relatively low compared with executive directors, as non-executives never want to jeopardise their perceived independence by being reliant on their fees. One day they may need to take the ultimate stand of resigning.”

Perhaps reflecting the lower priority that non-executive directors place on fees, the report shows that 63% of non-executives feel the role has become more attractive over the past few years due to its challenging nature and the ability to add value.

Philip Wright, partner at PwC who chairs the firm’s FTSE 350 non executive director programme, commented “While the non-executive role is more rewarding than ever, there is a risk that the extra time demands will make the role less viable for individuals who have full-time positions elsewhere. It would be disappointing if a company could not attract a chief executive as a non-executive, given the perspective and experience that such a person can bring to the job.”

For those non-executive directors who think the job has become less appealing, the majority cited the increased regulatory burden and reputational risk associated with the role. Indeed non-executive directors regard regulatory requirements as the biggest hindrance to their ability to do their job (27% of respondents) followed by lack of time to debate issues (17%).

Sean O’ Hare, remuneration partner at PwC, said “When companies were confronting the worst recession since the 1930s, many non-executives felt they should have been allowed to focus on steering the business through the downturn, rather than grappling with layer upon layer of corporate governance. There is a sense among many non-executive directors that the economic crisis was related more to risks in the financial services sector than corporates in general. There is consequent frustration among non-executives at the extent of regulatory focus on executive pay.”

On executive remuneration, the survey provides the perspective of the non executive directors who chair remuneration committees. Remuneration committee chairs feel their main challenge over the next year will be designing incentives linked to performance and business strategy. Managing executive and shareholder expectations are also expected to be significant issues. Indeed over half (51%) of remuneration committee chairs think shareholder representative bodies and proxy voting agencies hinder engagement on remuneration matters.

Sean O’Hare added “Non-executive directors have been frustrated by what they see as the ‘finger wagging’ of institutional shareholders on remuneration issues. This is a marked contrast to the wooing exhibited by ‘buy-side’ shareholders. Instead of focusing on rules, non-executive directors would like shareholders to help come up with solutions. With the FRC’s Stewardship Code published in July to promote better engagement between investors and companies, dialogue should become more constructive.

Other findings in the report

• Selection criteria for companies. Experience is the most important selection criterion for companies when appointing non-executive directors. Apart from in the financial services industry, companies are not generally looking for sector expertise but robust personalities with strong business acumen.
• Selection criteria for non-executive directors. For candidates considering a non-executive position, the quality of executive directors is the most important factor. In second place is the quality of the existing non-executives, followed by the financial strength of the company, the business strategy, time commitment required and the firm’s reputation. Fees are the least important consideration.
• Female representation. Across all non-executive roles, 5% in the FTSE 100 and 8% in the FTSE 250 are female.
• Performance evaluation. Only 21% of FTSE 100 firms and 6% of FTSE 250 companies perform individual director evaluation. Just one third of FTSE 350 companies have externally facilitated board evaluations every three years, as stipulated in the Governance Code.