January 23, 2019
Director Pay: Benchmarking “Meaningful Limits”
– Liz Dunshee
Recently, Willis Towers Watson announced the results from its annual analysis of outside director compensation among the Fortune 500. More companies have now implemented annual compensation limits – since shareholder ratification of those limits might be helpful if there’s a lawsuit (but keep in mind, as I’ve blogged, that a “high-water” limit will likely just be a factor in a court’s entire fairness evaluation, rather than entitling the board to a business judgment review). Here’s where things stand:
– 61% of companies have now adopted director pay limits, compared to 55% in 2016
– 78% of limits are set based on a fixed value rather than a fixed number of shares
– The median fixed-value limit is $600,000
– 32% of limits now cover both stock & cash compensation, which would provide the most protection in litigation
The survey also shows trends in overall pay levels & practices. It has a lot of great charts – including ones that show total pay & pay components at various percentiles. In light of recent director pay litigation and upcoming (but delayed!) changes to ISS voting policies, it’s not too surprising that median pay to outside directors increased by only 3% last year. What did surprise me was that – despite the risk of a shareholder suit or an eventual ISS “no” vote – less than half of companies are reviewing director pay annually. Here’s some other highlights:
– Median total pay increased to $267,500.
– The median value of annual cash compensation increased 4% – to $107,500 – bolstered by a 5% increase in the annual cash retainer to $100,000. The level of variable cash pay for board and committee meetings remained virtually unchanged, but fewer companies provided that form of compensation.
– The median value of annual stock compensation rose 3% to just over $150,000.
– The average mix of pay remained constant at 57% in equity, 43% in cash.
– Lead directors received an average of $30,000 additional compensation
– 94% of companies now have stock ownership guidelines and/or retention requirements for directors (typically based on a multiple of the annual retainer)
– 29% of companies review director pay only “periodically” or “from time to time” (I blogged a few months ago about one reason why this is risky)