A subtle change in UK corporate governance could reshape how non-executive directors approach their roles. The Financial Reporting Council (FRC) has updated its guidance to allow non-executive directors (NEDs) to be paid in company shares — a move that, while modest, could alter attitudes within British boardrooms and help the UK attract global talent.
Aligning Incentives and Attracting Talent
The adjustment comes amid growing concern that the UK’s declining number of stock market listings and subdued corporate activity have weakened its global competitiveness. Allowing share-based pay brings Britain closer to US corporate practice, where board members are typically rewarded in part through equity — ensuring they have “skin in the game.”
In the US, the average S&P 500 non-executive earns around $336,000, with roughly 60% paid in stock, according to Spencer Stuart. By contrast, non-executives at FTSE 100 companies receive about $144,000, all or mostly in cash.
The disparity has long been cited as a barrier to attracting top boardroom talent. The new FRC guidance aims to narrow that gap — at least in perception — by allowing UK companies to tie directors’ fortunes more closely to shareholder outcomes.
Challenges of Paying in Shares
Despite the potential benefits, share-based pay for NEDs presents both practical and ethical dilemmas.
Unlike employees, non-executive directors cannot simply be added to standard share schemes, raising technical questions about how to design appropriate incentive structures.
More importantly, their independence could be at risk. The central role of a non-executive director is to challenge management and safeguard shareholder interests. But what happens when their own financial interests are linked to the company’s share price?
If stock prices are rising, will directors still probe management decisions as critically? Conversely, during a potential takeover, might they weigh personal financial losses against objective judgment? These conflicts of interest pose serious governance questions.
A Balance Between Cash and Commitment
The alternative — sticking solely to cash pay — has its own pitfalls. Without financial exposure to company performance, directors may have less incentive to engage deeply. As one governance expert put it, “Without skin in the game, it’s too easy to just turn up, smile, and nod.”
Historically, UK non-executives were expected to buy shares personally, aligning themselves with shareholders voluntarily. That tradition has faded, replaced by a system emphasizing independence but sometimes at the expense of engagement.
If UK investors insist on maintaining the cash-only model, many argue they must pay more. The ongoing struggle of HSBC, which has yet to find a new non-executive chair willing to accept the heavy responsibility for relatively modest pay, illustrates how challenging it can be to recruit top-tier directors under the current compensation structure.
The Case for a Hybrid Approach
A blended model could provide the best balance — part cash, part stock — with deferred share vesting over three to four years. Such an arrangement would give directors a long-term interest in the company’s success while reducing the temptation to prioritize short-term share movements.
This approach is already common in the US and Europe and would modernize the UK’s governance landscape without undermining boardroom independence.
Quality Over Quantity
Ultimately, director pay is about more than just numbers. The attitude, expertise, and integrity of board members matter as much as their compensation package. The FRC’s change may be small, but it signals a shift toward valuing non-executive directors not just as overseers, but as stakeholders in corporate success.
As the saying goes — and as UK companies are rediscovering — in business, as in music, it’s not just what you do, it’s the way that you do it.
