reasonable directors fees?

Most small companies I work with have a board of directors that is comprised of the CEO, some interested shareholders (e.g. venture capitalists) and independents.  Better corporate governance and stronger due diligence have required all the directors to get way more involved with the companies they govern.  It is not unheard of for a board member to spend upwards of 200 hours / year with the companies they are involved with.  This on top of their ‘day jobs’.

The CEO and the interested shareholders obviously want the cash in the company to be for operations and therefore don’t typically draw a fee for sitting on the board.  However, when it comes to the independent directors:

what is an appropriate director fee for their efforts?

Typically most small companies offer a stock option grant to independents so that they are aligned with the long term goals of the company.  In some cases, I have also seen whole share grants so that they are aligned with the shareholders they represent.  However, with the global financial crisis happening right now (and share values plummeting) I am seeing an increasing number of small companies also consider a cash remuneration for independents.  Now the question is: how much?

I found a very interesting paper that provided the following guidance for calculating an appropriate director fee (based on 2004 information in the United States):

Small companies = US$3.19 per 1000 in net sales

Medium companies = US$2.05 per 1000 in net sales

Large companies = US$0.32 per 1000 in net sales

The idea being that it is relatively more expensive for small firms to hire qualified directors than it is for large firms.  Where “small” is considered to have a market cap of less than $70M.

So, if we had a company with roughly $3M in net sales that would work out to be an annual fee of US$9,570  ($3.19 * $3M / 1000).  For the few companies I have seen here in Vancouver, BC the going rate has been CA$1000/mos or CA$12,000 per year for net sales in the range of $3M-$5M.  So it seems this ballpark calculation could work.

Who approves what the fee should be and if it is paid?

Best practices would probably suggest that the shareholders of a company should decide what the fee should be for independent directors.  The best place to start would be to review your Articles of the Corporation to see if there is any guidance.  If not, the board of directors could vote and approve but the independents would have to abstain from the vote as it would be a conflict of interest.

And, finally, please remember that directors fees are considered employment income and therefore deductions should happen at source.