How to Set Non-Executive Director Remuneration: A Step-by-Step Framework for Australian Boards

Setting non-executive director (NED) fees is rarely as simple as finding another company’s annual report and copying its board fees. Two organisations with similar revenue can have very different governance demands, regulatory exposure and committee workloads. A defensible fee structure needs to reflect those differences while remaining understandable to shareholders and directors.

This practical framework shows Australian boards how to set, test and review NED remuneration, with examples you can adapt for your own organisation.

Step 1: Check the rules before discussing the numbers

Start with the organisation’s constitution, existing shareholder approvals, board policies and relevant legislation. For Australian public companies, section 202A of the Corporations Act 2001 provides a replaceable rule about directors’ remuneration, subject to the constitution. ASX Listing Rule 10.17 also matters for listed entities because increases to the aggregate NED fee pool generally require shareholder approval, subject to applicable exceptions.

Check whether the approved pool covers all proposed director fees and relevant benefits, and whether any director-specific arrangements need separate review. The fee pool is not the same as an individual director’s annual fee.

Board discussion: Do we know our approved aggregate fee cap, what counts towards it, and how much headroom remains?

Step 2: Define what each director actually does

Build a simple inventory of board positions before collecting market data. Distinguish the independent chair, ordinary NEDs, committee chairs and committee members. Record whether responsibilities are unusually demanding because of regulation, acquisitions, international operations, financial distress or major transformation.

Avoid paying twice for the same responsibility. Many boards treat the chair’s fee as inclusive of committee participation, although policies differ.

Quick check: Could you explain each additional fee in one sentence without referring only to the director’s seniority?

Step 3: Choose a credible peer group

Select companies that resemble your organisation in governance complexity, not simply brand recognition. For ASX-listed businesses, consider market capitalisation, revenue, assets, workforce size, industry, geographical reach and regulatory demands. For private companies, comparable ownership and board structures matter. For not-for-profits, funding model, service complexity and stakeholder accountability may be more useful than market capitalisation.

A manageable peer group might contain 10 to 20 organisations, with clear reasons for including each one. Document outliers and avoid letting one unusually high-paying board determine the recommendation.

Try this: Write down five companies you believe are comparable. For each, note one reason it belongs and one important difference. If you cannot explain the match, reconsider it.

Step 4: Compare fees on a consistent basis

Annual reports can disclose chair fees, base NED fees, committee fees, superannuation and other benefits in different ways. Standardise definitions before calculating the 25th, 50th and 75th percentiles.

Compare like with like: board chair with board chair, base NED fee with base NED fee, and committee chair premiums separately. Check whether disclosed fees are inclusive or exclusive of superannuation and whether partial-year appointments distort the figures.

These are positioning references, not automatic recommendations. A company at the lower end of market capitalisation might still have unusually demanding board responsibilities.

Step 5: Build a fee structure and calculate the total pool

Consider a hypothetical board with one chair and four other NEDs. The following fees are illustrative only, not current Australian market benchmarks.

Assume four NED base fees, one audit and risk committee chair premium, one remuneration committee chair premium, and three eligible committee member premiums. The illustrative annual total is:

$150,000 + (4 × $80,000) + $15,000 + $10,000 + (3 × $5,000) = $510,000.

That figure excludes any additional employer on-costs not already included in the fee definitions. Check superannuation treatment, applicable caps and other benefits before comparing the result with the approved aggregate pool.

Board exercise: If the approved fee pool were $600,000 on a comparable cost basis, this example would leave $90,000 headroom. Would that be enough for an additional director, future fee increases or unexpected committee needs?

Step 6: Test affordability, independence and fairness

A proposed fee structure should pass three tests. It must fit the approved budget and governance requirements; it must reflect responsibilities consistently; and it must not undermine the independence expected of non-executive directors.

For ASX-listed companies, the ASX Corporate Governance Council’s recommendations favour fixed NED fees rather than performance-based remuneration such as executive-style bonuses or options. Equity holdings may be used to encourage alignment, but arrangements need careful design to avoid conflicts or incentives that compromise independent judgement.

Also consider whether the chair-to-NED fee ratio makes sense, whether committee premiums reflect actual workloads and whether changes create unexplained differences between directors.

Decision question: Would a reasonable shareholder understand why one director receives more than another?

Step 7: Prepare a board-ready recommendation

A useful recommendation paper does not need to be lengthy. It should present the current fee structure, peer selection, market positioning, proposed changes, aggregate cost, available fee pool headroom and approval requirements.

Include at least three options: maintain current fees, move towards the peer median, or phase increases over two years. Show the financial effect of each option rather than asking the board to approve an isolated percentage increase.

Any directors with a conflict in the approval process should be managed under applicable governance requirements and the organisation’s policies.

Step 8: Review annually, not only when recruitment becomes difficult

An annual review can be proportionate. Update the peer group, check any changes in director responsibilities, compare fees with market data and calculate remaining pool headroom. A deeper review may be needed after a listing, acquisition, major regulatory change or board restructure.

Record the date of the review, information used, decision, approvals and implementation date. This creates a clear history for future directors, auditors and shareholders.

Interactive board remuneration checklist

Use these questions in your next board or remuneration committee meeting:

• Have we confirmed the constitution, approved fee pool and relevant approval requirements?
• Have we documented each board and committee responsibility?
• Does our peer group reflect governance complexity and organisational scale?
• Have we standardised fees for superannuation and other inclusions?
• Have we compared chair, NED and committee fees separately?
• Have we modelled total costs and future fee pool headroom?
• Have we considered independence, conflicts and shareholder expectations?
• Have we documented options, recommendations and approvals?

If several answers are unclear, resolve them before making a fee decision. A defensible NED remuneration framework is not necessarily complicated, but it should be consistent, transparent and supported by evidence.

Common questions

Should NED fees be linked to company performance?

Generally, NED remuneration is structured around fixed fees rather than performance bonuses. This supports independent oversight of executive performance and business risk.

Should the board chair receive committee fees?

Many organisations pay the chair an inclusive fee. Others may use different arrangements, but the policy should be explicit and avoid double-counting responsibilities.

How often should NED fees be benchmarked?

An annual high-level review is useful, with more detailed benchmarking when the board changes significantly or market conditions warrant it.

Can an ASX-listed board increase NED fees without shareholder approval?

It depends on the approved aggregate fee pool, constitution, listing rules and proposed arrangement. Increases to the aggregate NED fee pool generally require shareholder approval under ASX Listing Rule 10.17, subject to applicable exceptions. Adjustments within an existing approved pool may be possible, but must still satisfy other governance requirements.

A final practical recommendation

Do not start with a percentage increase. Start with a clear description of the board’s responsibilities, a relevant market comparison and a model of the full cost. That approach gives directors a stronger basis for making decisions and makes the outcome easier to explain.

For primary requirements, consult the Corporations Act 2001, ASX Listing Rules and ASX Corporate Governance Principles and Recommendations.

Need independent NED remuneration benchmarking? Contact Remunera to discuss board fee benchmarking, peer group selection and remuneration committee reporting.