The Advisors' Blog

Unlike executive compensation – which seems to constantly move in the direction of more complexity – director compensation has become more straightforward over the years, with a move away from meeting fees in favor of annual retainers. This detailed Compensation Advisory Partners memo recaps compensation data for the largest companies – for the full board, committees & committee chairs, and lead directors. It also looks at other trends in director compensation arrangements, such as pay limits and stock ownership guidelines. Here’s an excerpt about baseline compensation for board membership:

– Total Fees. Median board compensation increased by 2.6%, to $320K.

– Pay Structure. Companies rely mainly on annual retainers (cash and equity) to compensate directors. Pay programs for large companies are simple and tend to not use meeting fees. This year saw a 50% drop in companies who disclose using meeting fees, excluding those with meeting thresholds in place, with only four companies now providing board meeting fees. We support this approach as it simplifies administration and the need to define what counts as a meeting, though it may not be appropriate in all situations. Among the four companies that do provide meeting board fees, three have non-standard ownership.

– Equity. Consistent with prior years, providing full-value equity awards (shares/units) is the standard, with only 2% providing stock options (one of these companies grants both stock options and RSUs). Almost all companies denominated equity awards using a fixed value and not using a fixed number of shares. Using fixed value is generally considered best practice as it manages the “target” value awarded each year. This is consistent with practices observed in prior years.

– Pay Mix. On average, total pay was comprised of 63% equity and 37% cash, which is consistent with findings during recent years.

– Form of Increase: 17 percent of companies disclosed increases to board cash retainers, while 34% of companies disclosed an increase to their annual equity grant.

If you’re looking to review your director compensation program – or if you’re considering recruiting one or more new directors – this is a good memo to review. The CAP team suggests these considerations:

– Communication and Education. Not all companies get this aspect of effective compensation programs right. Oftentimes, distributing a simple summary (or “cheat sheet”) of the director pay program to participants can be an effective tool, that limits misunderstandings and an help prompt questions, as well as support consistent understanding of the program, philosophy and rationale behind the program.

– Recruiting New Directors. As boards look to refresh and diversify their membership, this may be the time to re-visit initial at-election equity awards for new directors. At-election grants can be a way to differentiate your company’s pay program in the recruiting process without a more costly increase to standard director pay levels.

– Board Leadership Roles. Taking on the role of non-executive Chairperson, Lead Director or Chair of a major Board committee can come with considerable additional time requirements, responsibilities, and reputational risk, yet additional compensation provided for most of these roles only reflects a modest premium on the standard director pay program. Providing greater additional compensation for the role of Lead Director of Chair of a major Board committee should be considered, in recognition of the typical time requirements, responsibilities and reputational risk individuals in these roles take on.

– Stock Ownership Requirements. Many boards, especially among the largest companies, require equity-based compensation be deferred until retirement (i.e., termination of board service). While we support alignment of director and shareholder interests through equity compensation, a standard stock ownership guideline (e.g., multiple of annual cash retainer) may be a competitive advantage when recruiting new directors who may be more focused on current compensation.

We’ve posted additional practical resources on this topic in our “Director Compensation” Practice Area.

– Liz Dunshee