May 30, 2014
Director Pay: More Emphasis on Equity Than Cash Over Past Year
– Broc Romanek, CompensationStandards.com
Here’s an article from Michael Bowie of Towers Watson:
Pay for non-employee directors at the largest U.S. companies grew modestly over the past year, consistent with the trends over the past several years. However, while last year’s review of the full Fortune 500 showed an emphasis on cash increases for directors, our early look at a subset of the Fortune 500 points to equity increases as the primary vehicle for pay increases in the most recent period. (For our most recent analysis of director pay in the full Fortune 500, see “Fortune 500 Outside Director Pay Shows Modest Growth, Emphasis on Cash,” Executive Compensation Bulletin, September 17, 2013.)
Towers Watson’s Executive Compensation Resources (ECR) unit analyzed director pay data disclosed in the most recent proxy for 260 Fortune 500 companies and compared those results against data for the same companies as reported in 2013 to identify early trends in 2014 director compensation. Here are the highlights:
– Total pay: The median value of total direct compensation for directors in this sample is approximately $246,250, up 3% from the previous year. The pay increase was primarily driven by equity values that increased 5% at the median over 2013 levels; median total cash figures did not change. The increase in equity values caused a slight shift in the overall pay mix for directors, with 56% of compensation delivered in equity and 44% in cash, compared with 55% equity and 45% cash at the same group last year. Thirty-eight percent of these companies made a change to their pay program, which includes their core annual cash (e.g., annual board/committee retainer, meeting fees) or annual equity compensation.
– Cash compensation: Just over a fifth (22%) of the companies in our sample increased their annual cash retainer for board service, with a median increase of $10,000. The median value of the cash per-meeting fee for board and committee meeting attendance did not change over the last year, remaining at $2,000 and $1,750, respectively. However, the prevalence of cash per-meeting fees continued to decline, dropping by 3% for board and 4% for committee meeting attendance.
– Stock compensation: The movement toward issuing stock grants based on a fixed-dollar amount as opposed to a fixed number of shares continues. Eighty-seven percent of all annual equity awards are granted based on a fixed-dollar amount, compared with 85% of grants at the same companies last year. Equity compensation delivered through full-value share grants remained far more prevalent than stock options, as 95% of the companies studied grant one or more forms of full-value shares. The prevalence of annual stock option grants for the same group fell from 12% to 10%. The use of one-time equity grants to new directors has also declined slightly this year. Just 11% of the sample provided a sign-on award upon appointment or election to the board in the most recent period, compared with 12% making these grants in the prior year.
– Board leadership: Twenty-nine percent of companies report having a non-executive chairman as the board leader, up from 26% of the same group in the prior year. Conversely, the prevalence of companies that have an independent lead or presiding director position fell from 77% to 75%. Additional compensation for serving in board leadership positions is primarily delivered in the form of a cash retainer. Incremental pay did not change significantly for either leadership position (chair or lead/presiding director).
– Stock ownership guidelines: Stock ownership and retention guidelines remain a common practice among almost all Fortune 500 companies, as 93% of those in our sample have one or both policies in place. The most common type of stock ownership guideline continues to be a multiple of the annual board retainer. One in ten of these companies either made an adjustment to their existing guidelines or established a new guideline since last year, and 44% of our sample have an ownership guideline of five times the retainer, compared with 38% in the prior year.
We continue to dig deeper into director pay trends as more companies file their 2014 proxies. Watch Executive Pay Matters for ECR’s annual update on the full Fortune 500, providing a comprehensive analysis of pay trends and insights on the landscape of director compensation and board governance.