Equity for NEDs – could it be the answer?
By Karen Fox and Lieke Bos
The Financial Reporting Council’s updated guidance marks a quiet but meaningful shift in UK corporate governance. For the first time, companies are encouraged to consider paying part of non-executive director (NED) fees in shares or non-performance-linked share rights, provided that independence is preserved and the approach is fully transparent.
It is a pragmatic change designed to make UK-listed boards more competitive internationally, and more aligned with the shareholders they serve. It also comes at a time when UK competitiveness, regulatory pressure and governance expectations are under sharper scrutiny, amplifying the need for clarity and modernisation.
A widening competitiveness gap
An EY study found that in financial services, UK NEDs earned 26 per cent less than their North American peers in 2023, up from 12 per cent in 2019.[1] Only 7 per cent of FTSE 100 companies currently pay NEDs in shares, and just 10 per cent of the FTSE All-Share index operate a formal shareholding policy.[2]
By contrast, the US and Canada have long normalised equity-based fees. Many boards deliver 50 to 60 per cent of annual remuneration in restricted stock or deferred share units, underpinned by ownership guidelines that typically require directors to hold three to five times their annual cash retainer. In Switzerland, roughly 80 per cent of large, listed companies now pay NEDs partly in shares. Across the Nordics, including Sweden, many listed companies also incorporate share-based elements into director pay. The prevailing model is not performance-linked equity, but an expectation that directors reinvest part of their cash fees into company shares and hold them for the long term. This strengthens alignment while avoiding performance-linked equity, which Swedish investor guidelines explicitly discourage for NEDs.
The picture across continental Europe, however, remains more cautious. In the Netherlands, the Corporate Governance Code explicitly prohibits supervisory board members from being remunerated in the form of shares or rights to shares, even though they may hold shares as long-term investments. The Code reflects a stakeholder-oriented model in which supervisory directors must remain independent of short-term financial incentives, reinforcing the prohibition on performance-linked or variable equity awards. In France, the AFEP-MEDEF Code states that NEDs cannot be considered independent if they receive variable compensation in cash or in the form of securities. While many French companies still expect directors to build a meaningful personal shareholding, performance-linked equity awards such as stock options or performance shares are discouraged for independent NEDs.
This variety underscores that “good governance” has no single formula. Each country’s approach reflects its governance culture and its chosen balance between independence, alignment and accountability.
Why this matters for the UK
The FRC’s clarification removes a long-standing ambiguity rather than signalling a radical shift. For years, many UK companies avoided any equity-based NED pay for fear it might be seen as compromising independence. At the same time, some NEDs we spoke to have always chosen to hold shares in their portfolio companies as part of their personal investment strategy, and this has generally been viewed as compatible with independent judgment when appropriately disclosed. The updated guidance now makes this explicit, confirming that independence and equity are not mutually exclusive, provided that the equity is not tied to performance and is structured with transparency and proportion.
This subtle change is important. It allows boards to use equity as a governance tool, fostering alignment and long-term perspective, without breaching the Code’s spirit. It also aligns the UK more closely with best practice from the other side of the Atlantic, where share-based remuneration is viewed as reinforcing commitment and ownership rather than eroding objectivity.
By enabling share-based pay and potentially increasing overall NED remuneration, UK boards can better attract global-calibre NEDs and demonstrate clearer alignment with shareholders. It may even help reverse the drift of talent toward private equity and US-listed boards, where equity has long been integral to director compensation and engagement.
Does equity introduce pay volatility?
One practical consideration is that share-based awards expose NEDs to market risk. While most boards grant a fixed-value award in shares (e.g., £50,000 worth at grant date), the realised value will fluctuate with the share price. If the company underperforms, the director’s holdings may be worth less than intended; if it outperforms, they share in the upside. This variability is not viewed as performance pay but as alignment with shareholder experience. Boards typically mitigate concerns by using restricted stock or deferred share units rather than options, and by ensuring the equity component remains proportionate and transparent.
Equity is not the full solution
The FRC guidance rightly prohibits performance-related pay for NEDs, removing the most direct conflict of interest. Still, several subtler considerations remain. Like in the Netherlands and Germany, in the UK, NEDs are expected to represent multiple stakeholders, not only shareholders, and excessive equity participation could distort that balance. Large personal holdings can raise questions about independence or create perceived bias in sensitive board discussions.
More important will be how investors respond. Under the UK’s “comply or explain” framework, companies that move towards equity-heavy pay will need to communicate their rationale clearly to avoid perceptions of governance dilution. Proxy advisers and major institutional investors will be watching closely how companies justify any shift in NED equity, particularly where the balance between alignment and independence is sensitive.
The path forward
The FRC’s move is a step toward a more modern and flexible approach, but the real challenge lies beyond remuneration. The question is how to make UK listed board roles more interesting, competitive and rewarding for experienced directors who increasingly look to private or international opportunities.
The differentiators will be culture, clarity and confidence: clear expectations, purposeful chairing and well-structured board processes that make the role meaningful in both impact and influence. Against this backdrop, strengthening the capability, clarity, and alignment of boards becomes even more important.
The Azura perspective
At Azura, our work sits at the intersection of governance, leadership and long-term organisational direction. As a boutique firm specialising in board advisory, executive and non-executive search and leadership assessment, we help Chairs, CEOs, and investors create the clarity and alignment required for effective decision-making. Across the UK, the Netherlands, and the US, we see how expanding governance demands and rising risk aversion can narrow strategic space. Our role is to help boards protect and widen it by strengthening succession pipelines, sharpening board–executive alignment, improving decision-making, and ensuring leadership capability is equipped for the horizon ahead. Our approach blends data-informed insight, behavioural depth, and international perspective to support decisions that serve not only the urgent, but the important.
If you would like to discuss how leading boards are evolving their approach to governance, leadership or succession, we would be glad to continue the conversation.
About the authors
Lieke Bos leads Azura’s Board and Leadership Advisory practice, focusing on board and team effectiveness reviews, succession planning and leadership assessment globally.
Karen Fox is Partner and Board Practice Lead at Azura, with more than a decade of experience supporting organisations with Chair, Non-Executive and Trustee appointments. She advises boards on governance, effectiveness and senior leadership transitions.
[1] “Gender pay gap narrows across UK financial services boardrooms,” EY, 13 January 2025.
[2] “Non-Executive Director Fees in the FTSE All-Share 2024”, Alvarez and Marsal.
