Insights

Board compensation: practices and trends in SME

Overview
Published on: November 24, 2022
Subjects:  Surveys and forecasts, Total compensation, Executive compensation, Boards of directors and governance

Earlier this year, the Centre universitaire d’expertise en gouvernance de sociétés published a research report entitled La gouvernance des PME : Constats et apprentissages tirés de 15 entreprises québécoises [SME governance: findings and lessons from 15 Quebec companies]. 

As the authors point out, SMEs must regularly review their business model and growth strategy to set themselves up for success in a highly complex, competitive environment. Hence, more and more SMEs are adopting better governance structures, usually in the form of a board of directors, while some will prefer to set up an advisory committee before adopting a formal board. 

Based on our observations, governance is gaining traction in the private sector, especially for SMEs with ambitious goals. Like publicly listed companies, these organizations want to surround themselves with external directors whose skills can contribute to their strategic development, and compensation is often a key element of their recruitment strategy. But is it a good idea for SMEs to compensate their board members, and if so, how, and how much?

Drawing on the report of the Centre universitaire d’expertise en gouvernance de sociétés and on our latest survey on compensation for board members and advisory committees of private companies, let’s take a closer look at market practices and emerging trends in the SME sector in Québec. 

The factors influencing governance compensation 

As outlined in the research report, there are four types of SME governance, and this choice of structure generally dictates the compensation policy.
 

Type of governance

Description

Compensation

Coaching

This less formal governance structure is usually appropriate for start-ups because it provides mentoring for a management team that may not have a lot of experience.

Does not generally involve compensation.

 

Structuring

This more structured and more formal type of governance is preferred by companies with a high growth potential, allowing management to become familiar with governance before external investors are brought in.

Can sometimes involve some form of limited compensation.

Agility

This governance structure is less common and most often seen in mature companies with a seasoned management team and centralized shareholder structure.

Can sometimes involve compensation.

Continuity

This more formal type of governance is preferred by companies with a robust management structure and multiple stakeholders.

Involves compensation.

Aside from the type of governance, several factors will impact the decision and the way administrators of private companies are compensated, including:

  • Its legal structure (non-profit or for-profit)
  • Its stage of development (start-up or mature)
  • The expertise sought
  • Its recruitment pool (Canada, United States or international)
  • The practices observed in its sector of activity
  • Its ability to pay

Mechanisms and trends in governance compensation 

The main compensation mechanisms that enable governance to generate positive returns for SMEs are lump-sum payments (annual fees), meeting fees and long-term incentive plans (LTIPs).
Our study shows that only 5% of organizations do not compensate board members (mainly companies with a social purpose). Of the companies that have decided to compensate their governance, 81% provide cash compensation only (annual fees and meeting fees), 3% offer an LTIP (comprised of shares or phantom shares), while 11% opt for a mixed form of compensation (cash and LTIP). The size of the company may also be a factor, as illustrated below. 

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Other learnings from our survey of private companies include:

  • Overall, board and committee members’ compensation is on the rise, both for private and listed companies. This trend reflects a growing appreciation for the director’s role, and the increased risks, responsibilities and workload that come with the role.
  • The average compensation of board directors in companies of all sizes ranges from $9,083 to $30,382 per year.
  • In 73% of the organizations surveyed, the Chair of the Board does not simultaneously serve as the CEO and, depending on the size of the organization, his or her average annual compensation ranges from $21,563 and $77,708 (for for-profit companies). 
  • The median attendance fee for advisory committee members is $1,250 per meeting, which is fairly close to the fee paid to board members. 
  • Since 2016, there has been a steady increase in the average attendance fee offered to board directors and subcommittee members. 
  • That said, we also note that a growing number of companies, especially larger ones ($50M and above), are moving away from meeting fees to pay annual fees only.
  • As with listed companies, the compensation of the HR committee, which is often paired with the Governance committee, is on the rise and is getting closer to that of the Audit committee. 

Other current trends include the delocalization of labour and access to remote work, which could have an impact on the directors recruitment pool, as well as the integration of ESG considerations into the executives’ long-term incentive plans, which could eventually be extended to the board. But of course, that all remains to be seen.

Key takeaways

The market is increasingly appreciative to the value added by board and advisory committee members not only for listed companies, but also for private companies where positive effects on financial performance, strategic planning, brand image and business opportunities have been observed. 

SMEs seeking to establish a high-caliber governance structure to drive performance and growth can only stand to benefit from the current trend of offering competitive compensation to recruit and retain top talent. 

SMEs will be able to develop a governance compensation program to support their objectives by seeking balance (between the expertise sought and the time investment) and alignment (with its ability to pay and the competition), and by seeking support from experts who can step in with an objective perspective. 

Authors

  • Bridgit Courey, CPA, ASC, Senior Consultant
  • Evelyne Gaudreau, Consultant

Let’s keep the conversation going...

Do you want to find out more about compensation and governance for SMEs? Feel free to contact us to talk about your needs or take a look at the following documents:

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