This document largely deals with the remuneration of directors of companies
under the Corporations Act 2001 (Cth) ('Act'). This covers all companies listed
on the Australian Securities Exchange (ASX), the vast majority of for-profit
organisations and those not-for-profit organisations which have the legal
structure of a company limited by guarantee. It does not directly cover
payments to directors/committee members other not-for-profits such
as incorporated associations, co-operatives and government boards. However,
many of the principles discussed can be applied to other forms of organisation.
What is the difference between directors’ fees and
The wider community and the media often seem to be confused about directors’
fees and executive remuneration. There are significant differences between
the two. Directors may be classified as non-executive directors or executive
directors. Executive directors are full-time employees of the company with
Directors are not entitled to payment for services unless this is provided
for in the constitution of the organisation or approved in a resolution of
shareholders. The Act provides that ‘the directors of a company are to be paid
the remuneration that the company determines by resolution’ (s 202A (1), a
replaceable rule). The company ‘may’ also pay the directors' travelling and other
expenses that they properly incur:
• in attending directors' meetings or any meetings of committees of directors;
• in attending any general meetings of the company;
• in connection with the company's business.
“ It is in shareholders’
interests to remunerate
appropriately in order
to attract the best calibre
of person to serve on the
should reward directors
for the value they add
to the organisation as
well as reflecting their
duties and the legal
liability assumed on
behalf of shareholders.”
A person who is the single director and shareholder of a proprietary company
is to be paid any remuneration for being a director that the company determines
by resolution (s 202C).
It should be noted that s 202A(1) is a replaceable rule. This means that
it can be varied in the company’s constitution. Constitutions can set out that
all directors may not be paid or alternatively, only non-executive directors can
be paid for the role of director. Many constitutions state that directors may
be paid and specify a process whereby either the total amount for the entire
board or amounts for specific directors and governance roles may be approved.
In short, companies have considerable flexibility in establishing if and how
directors are to be paid.
Non-executive directors are remunerated for their role as directors of the
company. This remuneration is paid for the time they spend on directorial duties,
their experience, reputation and other skills they bring to the board, and for the
risk they accept for being a director.
It is in shareholders’ interests to remunerate appropriately in order to attract
the best calibre of person to serve on the board. Remuneration should reward
directors for the value they add to the organisation as well as reflecting their
duties and the legal liability assumed on behalf of shareholders.
Executive remuneration refers to salaries and bonuses paid to executives
as senior company employees and forms part of the executive’s employment
contract with the organisation. The board of directors determines executive
remuneration and bonuses. Where senior executives are also legal directors (that
is executive directors) they usually receive no extra fee for serving on the board.
Who determines the total amount of directors’ fees?
There are three basic questions with respect to determining directors’ fees.
The first is who determines the total amount to be paid to the non-executive
directors? The second is who approves the total amount to be paid to the nonexecutive
directors? The third is, once the total amount is approved, how is this
sum divided between various directors?
With respect to the first question, the determination of the total amount of
directors’ fees is normally made by the board, but in some instances may be
made by the members (shareholders) directly.
For many companies which have large numbers of shareholders or members
such as publicly listed companies and not-for-profits with large numbers of
members, it is not practical for shareholders to determine the total amount to
be paid to the board, let alone the specific amounts to be paid to individual
directors. Consequently, the board, often through a remuneration committee as
discussed below, will make a recommendation concerning the total amount of
“ A number of commercial
data on current levels
of directors’ fees broken
down by factors such as
company size, industry
and so on.”
The exception to this norm is where a company may have one or very few
shareholders. For example, a company which is owned by very few individuals
such as many family owned companies, a subsidiary of another company
or a company which is owned by government. In this situation the owners
may decide to set the level of remuneration directly. They may or may not
consult with the board concerning the amount.
The board must be able to justify its directors’ fees to members
and shareholders. Suggested considerations include:
• Size, nature and profitability of the company
• Complexity of operations – lines of business, geographic spread
• Industry sector – some sectors are paid more than others
• Structure and responsibilities of board including the number
of board committees
• Risks and challenges of the business
• Qualifications and experience
• Time commitment required
• General performance and involvement in value-added decision making
• Additional responsibilities, for example chair of a committee, other special
duties such as at takeover time
External market factors
• Business and economic conditions
A number of commercial organisations provide data on current levels of
directors’ fees broken down by factors such as company size, industry and
so on. Some boards also commission remuneration consultants to make
recommendations as to directors’ fees based on industry benchmarks and
Who approves the total amount of directors’ fees?
The answer to who has the final right of approval
of the total amount of directors’ fees depends on the type
of company, and possibly the company’s constitution.
As noted above, director remuneration generally is dealt
with under section 202 of the Act. Section 202A (1), which
determines whether directors can be paid, was discussed
Section 202B (1), which is not a replaceable rule and
hence applies to all companies, allows for members
(shareholders) to obtain information about payments
to directors. Specifically:
‘A company must disclose the remuneration paid to each
director of the company or a subsidiary (if any) by the
company or by an entity controlled by the company
if the company is directed to disclose the information by:
(a) members with at least 5 per cent of the votes
that may be cast at a general meeting of the
(b) at least 100 members who are entitled to vote
at a general meeting of the company.’
As a general principle, the board presents what they think
is an appropriate pool of fees for the board as a whole to
shareholders at a general meeting. The fees, if approved,
represent the upper limit that can be paid to the board. The
board then decides how the pool is split between individual
directors. This is the amount paid to non-executive
directors. Shareholders only have to be approached when
the board wants to increase the pool – it is not an annual
Below is discussed the specific situation for listed
companies, non-listed for-profit companies, companies
which are regulated by the Australian Prudential Regulation
Authority (APRA) and not-for-profit companies.
Shareholders of public companies generally approve an
upper limit or pool of fees for the board as a whole in
general meeting. The board then determines how this is
distributed to individual directors. Many companies obtain
by resolution an upper limit to the total amount to be paid
on an ongoing basis and then infrequently seek to have
this increased. Usually companies do not allocate this total
amount. A listed company will need to have sound reasons
for seeking an increase to this amount.
Listed companies must account annually for directors’ fees
as well as the remuneration paid to senior management
under s 300A of the Act. Listed companies must present
a remuneration report to shareholders at every annual
general meeting showing the board's policies for
determining the nature and amount of remuneration
paid to key management personnel (which includes
any director), the relationship between the policies and
company performance, an explanation of performance
hurdles and actual remuneration paid to key management
The Act was amended from 1 July 2011 to provide for the
two strikes rule in relation to the remuneration report. At
the annual general meeting, the shareholders must vote
approval or otherwise of the remuneration report. The first
strike is when a company’s remuneration report receives
a no vote of 25 per cent or more. Where this occurs, the
company’s subsequent remuneration report must explain
whether shareholders’ concerns have been taken into
account, and either how they have been taken into account
or why they have not been taken into account.
The second strike occurs where the company’s subsequent
remuneration report receives a no vote of 25 per cent or
more. Where this occurs, shareholders will vote at the same
annual general meeting to determine whether the directors
will need to stand for re-election within 90 days. If this
resolution passes with 50 per cent or more of eligible votes
cast, then the spill meeting will take place within 90 days.
At the spill meeting, those individuals who were directors
when the report was considered at the most recent annual
general meeting will be required to stand for re-election
(other than the managing director, who is permitted
to continue to run the company).
Non-listed for-profit companies
For a non-listed for-profit company, be that company
a public or a private company, the constitution should
set out the mechanisms for the approval and reporting
of directors’ remuneration. If the replaceable rule 202A
(1) has been followed, the total amount to be paid to
directors should be approved at a general meeting of the
shareholders. Constitutions may contain more specificity
concerning the approval and reporting mechanisms.
APRA-regulated financial institutions
There are a number of special requirements for financial
institutions (eg banks, building societies, insurance
companies) regulated by the Australian Prudential
Regulation Authority. For example, Prudential Standard
CPS 510 ‘Governance’ (effective 1 January 2015) requires
a regulated institution to have a remuneration policy.
That remuneration policy covers, among others, executive
directors and must provide that the performance-based
components of remuneration is to be designed
to align remuneration with prudent risk-taking
and must incorporate adjustments to reflect:
• The outcomes of business activities
• The risks related to the business activities taking account,
where relevant, of the cost of the associated capital
• The time necessary for the outcomes of those business
activities to be reliably measured.
Not-for-profit organisations may or may not pay directors.
This is sometimes covered by regulations. For example,
non-government schools in NSW are not allowed to pay
directors, no matter what the legal structure of the school.
Some not-for-profits take the view that directors should
see their contribution as service to the community and
hence receive no remuneration outside of reasonably
occurred expenses. Other, usually larger, not-for-profits
take the view that they expect a considerable workload
from directors and are seeking directors with high levels
of skills. Hence it is appropriate to pay in these
circumstances and as a past study has revealed, there
is a growing trend to remunerating directors in not-forprofit
companies with reported remuneration rising
from 8 per cent in 2001 to 19 per cent in 2013.1
As noted above, when a not-for-profit company
is a company limited by guarantee, the provisions of
section 202 also apply. However, the Australian Charities
and Not-for-profits Commission (ACNC) Governance
Standards must also be considered. While not specifically
mentioning payment to directors, Governance Standard
2 is relevant:
"‘Charities that have members must take reasonable steps
to be accountable to their members and provide them
with adequate opportunity to raise concerns about how
the charity is governed."²
Under this Governance Standard it can be expected that
the charity will seek members approval of the total amount
of the proposed directors’ remuneration and provide
details, usually as part of the annual report, as to what
payments were made to directors. In short, although not
legally required, it is recommended that not-for-profits
which pay directors adopt many of the practices concerning
approval and reporting as apply to listed companies.
How to allocate the total amount of director’s
fees among the directors
There is no one best way of structuring director fees.
Each organisation’s system must be tailored to their
specific circumstances. However, there are some general
guidelines set out in the ASX Corporate Governance
Council’s (ASXCGC) Corporate Governance Principles and
Recommendations 3e (2014). Firstly, Recommendation
8.2 states that companies should clearly distinguish the
structure of non-executive directors' remuneration from
that of executive directors and senior executives.
As to non-executive director remuneration, the ASXCGC
Corporate Governance Principles and Recommendations
3e state that companies may find it useful to consider the
following in relation to non-executive directors:
• Non-executive directors should normally be remunerated
by way of fees, in the form of cash, non-cash benefits,
superannuation contributions or salary sacrifice into
equity – they should not normally participate in schemes
designed for the remuneration of executives
• Non-executive directors should not receive options
or bonus payments
• Non-executive directors should not be provided with
retirement benefits other than superannuation.
As to executive remuneration, the ASXCGC Corporate
Governance Principles and Recommendations 3e suggest
that executive remuneration will involve a balance between
fixed and incentive pay. Those principles go on to provide
guidance in relation to the following aspects:
• Fixed remuneration
• Performance-based remuneration
• Equity based remuneration
• Termination payments
As noted previously, remuneration consultants may be able
to assist with the structuring and size of a remuneration
package for directors but smaller organisations may find
the cost to be prohibitive. Listed companies are required
to disclose details relating to the use of remuneration
consultants. In addition, for listed companies, remuneration
consultants are required to be engaged by non-executive
directors, and must report to non-executive directors or the
remuneration committee, rather than company executives.
There are many different mechanisms which determine how
much individual directors are paid. Common practices are:
• The chair will normally be paid more than
• Chairs of board committees may receive
an additional loading
• Directors sitting on board committees may
also receive a loading, in recognition of their
Additional fees should not be construed as meaning that
these directors carry responsibilities above those of other
directors on the board (this is a matter for legal debate).
The chief reason for appointing a chair and subcommittees
is to obtain efficiencies in getting the board’s work done.
The board as a whole retains collective responsibility for
decisions on recommendations made by committees.
What is the role of a remuneration committee?
Creating any board committee is a means of managing
the workloads of directors on the board. Rather than all
directors discussing and debating every issue an organisation
faces, committees allow a small group of directors to
investigate issues in detail and report back to the board
with recommendations for action. The full board is then
responsible for making decisions. Common committees
include audit, risk, nominations and remuneration.
The main purpose of a remuneration committee
is to develop policies and practices for the remuneration
of directors, the CEO and senior executives, to disclose
this to the market (s 300A, Corporations Act 2001)
and to review the remuneration and benefits paid.
The responsibilities of the committee are captured in
a charter approved by the full board. The charter should
state that the committee does not have any authority for
decision-making delegated to it by the board – the full
board retains responsibility for decision-making.
In relation to directors’ fees, the committee makes
recommendations to the board on an appropriate level
and structure of fees. The entire board then collectively
decides what is put to shareholders for approval.
Recommendation 8.1 of the ASX Principles states that
boards should establish a remuneration committee. Under
ASX listing rule 4.10.3 if a listed company does not follow
an ASX Corporate Governance Council recommendation it
must explain why not. Recommendation 8.1 further states
that the committee should be comprised of a majority of
independent directors with an independent chair, and have
at least 3 members. The commentary to Recommendation
8.1 recognises that having a remuneration committee
may not be practical for small listed companies, so instead
suggests that these companies have processes in place which
allow the full board to consider the same issues
as the remuneration committee would.
ASX Listing Rule 12.8 states that a listed entity which
was included in the S&P/ASX300 Index at the beginning
of its financial year must have a remuneration committee
comprised solely of non-executive directors.
Many larger non-listed companies, including not-for-profits
will also have a remuneration committee although they are
not legally obliged to have one.
Practical matters around director remuneration
When are directors paid?
Every organisation will operate differently. In general,
directors can expect to be given an annual amount of fees.
It is not recommended that fees be calculated using an
hourly rate as this may promote time-wasting behaviours.
The organisation will decide how frequently this will be
paid, eg monthly, quarterly. Directors’ fees are paid for
services rendered, hence they would normally be paid in
arrears. It is not recommended that payments be made in
advance. It can cause problems in cases where a director
resigns, dies or is disqualified from acting as a director.
Does longer tenure entitle a director to more pay?
Many factors contribute to how much a director is
paid. As discussed above, these factors include the size
and complexity of the organisation, time commitment,
additional responsibilities such as sitting on a board
subcommittee, etc. Length of time served on a board
should not be used to determine a director’s fees
as it is not a true indicator of the value that
an individual adds to the board.
Are directors entitled to higher fees when their
workload increases significantly?
Instances of when a director’s workload may increase
significantly include during times of a merger,
takeover or acquisition.
When the board recommends a pool of fees to shareholders
for approval, it might request an amount higher than their
needs at that point of time. In times of higher workloads,
this may give some leeway for additional payments
above normal fees but within the approved upper limit.
Experience has shown that it can be difficult for directors
to ask for additional payments due to unexpected
workloads after the event.
Can a director’s personal company be paid instead of
paying the director directly? How is the income taxed?
The rules regarding the taxation of directors’ fees are very
complex. General advice was sought from the Australian
Taxation Office (ATO) in 2007 on these questions.
The response received from the ATO confirms this
complexity – the answers depend on numerous factors,
which makes it almost impossible to give a simple answer
to either question.
Directors are encouraged to seek their own advice
from a tax lawyer or tax accountant tailored to their
1 Australian Institute of Company Directors, Directors Social Impact Study, 2013
2 Australian Charities and Not-for-Profits commission (ACNC), Meet governance standards, [website], 2016.
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