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Pay structures for non-executive directors are governed by legislation as well as by the corporate governance code © Jason Alden/Bloomberg

Investors have warned ministers not to water down rules on how non-executives are paid because of concerns that any changes could compromise their watchdog role.

The government is pushing to change the rules to allow non-executives to take a bigger proportion of their income in shares as a way to link their financial rewards with the success of the company.

Pay structures for non-executive directors — who give independent oversight of company management — are governed by various parts of legislation as well as the corporate governance code.

Under current rules, non-executive directors are able to buy and hold shares in the companies on whose boards they sit. However, the code discourages the use of performance-related pay, such as long-term incentive plans and similar bonus schemes.

The code says that “circumstances which are likely to impair a non-executive director’s independence include whether a director participates in the company’s share option or a performance-related pay scheme”.

Investors have said any attempt to change this would not be welcomed given the need to separate the management of a company with its board that oversees how well it is being run.

Sarah Wilson, chief executive of investor adviser group Minerva and corporate governance expert, said the pay rules needed to make the distinction between “being a manager and being a supervisor” of a company.

“Non-executive directors are not employees and they should not be paid as part of the management, as they are there to make sure that the management is doing the right thing and not to push the share price. Performance-related pay or similar incentives would not be appropriate.”

Andrew Ninian, director of stewardship and corporate governance for the Investment Association, said that in general shareholders supported non-executive directors receiving part of their fees in shares when bought at the market price “as this aligns their long-term interests with that of the company and its shareholders”. 

However, he added, the body did not consider it “appropriate” for non-executive directors to receive incentive awards geared to the share price or corporate performance because it could “risk undermining the independence of the individual and their decision-making”.

The government said: “We are exploring whether there are any unnecessary restrictions on paying non-executive directors in shares, which could ensure they are fully invested in the success of the company they run. If the company does well, directors do well.”

It underlined that the plan related only to non-executives — and not executive directors — and said it was not looking at increasing how much “NEDs” were paid but only adjusting what proportion of that pay could be through shares or share options.

The i newspaper revealed a letter from Steve Barclay, chief of staff in Downing Street, suggesting that Number 10 wanted to make the chances to “reduce the overall burden on business” as part of wider deregulatory measures.

“Removing restrictions on director (and specifically non-executive director) remuneration,” the letter said.

The government is also looking to strengthen the rules on clawing back bonuses from directors if their company collapses to stamp out “rewards for failure”.

Keir Starmer, Labour leader, accused prime minister Boris Johnson at Wednesday’s prime minister’s questions of trying to relax a separate cap on bankers’ bonuses.

But Number 10 rejected those claims, saying. “That remains in place and is the responsibility of the independent Prudential Regulation Authority,” it said.

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