When deciding how much to pay an NED there are a number of factors to consider as a business.
Time and commitment
Before appointing a NED, you should consider what level of time and commitment you are looking for. Remember that an NED will not be involved in day to day operations and typically will spend 1-2 days per month with a company. Quite simply, the more time you need them spend with your business, the more they will expect to be paid.
Flexibility
You will also need to consider how flexible your appointment should be. For example, if you have a key event on the horizon, such as a large fundraising or planned acquisition, then you may require more of the NED’s time than usual and you should factor in the need to pay a bit more during these times.
Experience
Experienced NEDs are more likely to want to be compensated at a higher rate than less experienced NEDs. But paying through the nose doesn’t necessarily mean you will find a better fit for your business. Depending on the nature of your business, a younger NEDs may, for example, have a better understanding of social media channels or the market you are trying to target.
Ok. So what exactly should I be paying an NED?
Well, according to a 2006 survey from the Institute of Directors (IOD), the average pay per day for a NED was £1,020. This amount drops for smaller businesses and increases for large companies.
It also found that 24% of NEDs work ‘unpaid’. This means that instead of receiving cash consideration, the NED receives share options or equity in the business. An NED will usually look for around 1% of the total management equity pool.
In addition to any financial compensation or equity, you should also expect to reimburse the NED for any reasonable expenses incurred in connection with their role e.g. travel, accommodation. The location of your NED is worth bearing in mind when deciding who to appoint.
Finally, when looking at what you can afford, remember that many NEDs are financially secure and are simply looking for a new challenge or an opportunity to mentor young individuals. So if you don’t ask you don’t get!