The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

July 16, 2018

Director Pay: Limits Aren’t Enough

Liz Dunshee

The fallout from last year’s Investors Bancorp case continues. I’ve blogged about how most companies now set director pay limits. But that’s only the first step in protecting directors and their pay decisions (and avoiding costly settlements). This blog from Jim Barrall tracks through recent settlements by Clovis Oncology and OvaScience – and examines a proactive approach by JP Morgan Chase. Here’s an excerpt:

JP Morgan Chase’s director compensation program, which is now locked into its shareholder-approved omnibus plan, was adopted one year in advance of the expiration of the 2015 plan and appears to have been informed by Investors Bancorp, provides companies with a good roadmap of the plan design issues and possible solutions that should be considered by companies that would like to reduce their exposure to Investors Bancorp and its progeny.

As described on page 84 of the proxy statement, the key features worth consideration are that:

    (i) it specifies the dollar amounts of the directors’ basic and special service retainers, thereby protecting these amounts under the business judgment rule because they have been ratified by shareholders;

    (ii) even if the board exercises its discretion to increase any of the retainers after 2019 within the prescribed bands and even if such an exercise of this discretion would be subject to the entire fairness standard of review, the dollar amounts subject to this limited discretion are so small as not to make them attractive targets for plaintiffs’ lawyers, whose fees are largely based on the amounts that directors were paid using their discretion;

    (iii) if the board ever determines to pay special fees to any directors under the plan’s safety-valve provision, it is highly likely that this compensation could be protected by the business judgment rule by having it approved by the board or a committee with a majority of members who are disinterested with respect to the compensation; and

    (iv) these provisions apply to total stock and cash compensation and give the board discretion to determine the mix.

Finally, the terms of the director compensation program are included in an omnibus equity plan that also covers employees and could be resubmitted periodically to shareholders for approval when a company requests more authorized shares. Including these provisions in an omnibus plan and submitting them for approval with other plan changes every several years likely would not expose the directors program to as much risk of shareholders venting their possible unrelated grievances with the company or its board on director compensation as could be the case if the program were submitted in a free-standing director plan, as taught by the Clovis Oncology case.

We’ll be covering director pay at our “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Register by August 10 for a discounted rate.