How independent directors’ pay doubled in five years | Mint

How independent directors’ pay doubled in five years

Companies are especially seeking non-independent directors with niche talent in digital and consumer behaviour, and an understanding of generative artificial intelligence. (Photo: iStock) (iStock)
Companies are especially seeking non-independent directors with niche talent in digital and consumer behaviour, and an understanding of generative artificial intelligence. (Photo: iStock) (iStock)

Summary

  • Demand for independent directors has become urgent, with more than 2,000 set to complete their tenures by April

Independent directors are in huge demand and companies are rewarding them handsomely with hefty pay hikes to be on their boards.

At an average annual increase of 15%, the compensation of independent directors of 50 stock bellwethers doubled over the last five fiscal years, shows a Deloitte study shared exclusively with Mint.

 

Sarvesh Kumar Sharma/Mint
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Sarvesh Kumar Sharma/Mint

Between 2017-18 and 2022-23, independent directors on the boards of life sciences companies reaped the biggest hikes, although those with IT services firms got paid the most, exceeding 1 crore in annual compensation.

Overall, four out of 10 independent directors now earn salaries beyond 1 crore, compared with just one out of 10 five years earlier, according to Deloitte.

“Independent director remuneration increased 15% CAGR (compounded annual growth rate) over the last 5 years to 58 lakh in FY23 in Nifty-50 companies," the audit firm said in its study titled Independent Director Remuneration in India–Beyond the headlines. “The average independent director remuneration is the lowest in financial services, while it is highest in (the) IT services sector."

Compensation for independent directors has surged over the past few years as companies scramble to recruit niche and skilled individuals to their boards, particularly as senior industry executives typically prefer joining “brag value boards", or boards of established companies. Demand for them has become urgent now, with more than 2,000 independent directors set to complete their tenures by April 2024.

Firms are especially seeking non-independent directors with niche talent in digital and consumer behaviour, and an understanding of generative artificial intelligence.

IT firms end up offering higher remuneration on average to their independent directors chiefly because they have four times more international hires than firms in other sectors. Compensation for these directors increased from 1.04 crore in FY18 to 1.52 crore in the fiscal year gone by.

But it is the life sciences industry that has registered the sharpest spikes with companies keen to retain their independent directors. Average compensation for independent directors in the sector increased from about 30 lakh in FY18 to 64.8 lakh in FY22 and 70 lakh in the following year.

Directors in the financial services sector have had no such luck. Limits on remuneration (in addition to fees and expenses related to attending meetings) for non-executive directors at banks and insurance companies is capped by the Reserve Bank of India at 20 lakh. Independent directors fall under the subset of non-executive directors.

“Life Sciences, which is largely a promoter-led sector, witnessed the highest growth in independent director compensation as two firms introduced the component of commission in their remuneration structure compared to 2018," said Dinkar Pawan, director, human capital, at Deloitte.

Those two companies did not pay commissions to independent directors before the pandemic years but have started doing so since 2021, according to Deloitte. The consulting firm did not disclose individual company data.

An independent director’s remuneration is largely dependent on a mix of fees for attending board meetings, called sitting fees, and commissions linked to a company’s performance. While sitting fees are capped at 1 lakh, commissions are expected to increase.

“We expect that the pay mix will become more skewed towards commission in the coming years as more firms hit the sitting fee cap," said Pawan.

Currently, about 84% of a director’s remuneration is in the form of commissions, with sitting fees accounting for the rest; excluding banks and insurance companies, the commissions average about 89%.

The sitting fees are dependent on whether a director attends a regular board meeting or an audit/nomination/remuneration committee meeting. According to Deloitte’s study, the median sitting fees for board meetings increased from 50,000 in FY18 to 1 lakh in FY23.

Establishing a well-defined and role-based remuneration structure, Pawan said, would increase transparency and help attract the right talent to meet the increasing demand for, and expectations from, independent directors.

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