The Advisors' Blog

If you think directors at large-cap public companies are bringing home a lot more in board compensation than their counterparts at smaller companies, you’d be wrong, according to FW Cook’s annual review of director compensation. The report summarizes trends at 300 companies of various sizes and industries. Here were a few key findings:

– Annual director compensation growth remains modest, particularly for mid- and large-cap companies.

– This trend goes back further than the three-year look on the prior page – looking across our last 10 studies, annualized growth in median total pay has been 2.9% for mid-cap companies and 2.2% for large-cap (4.9% for small-cap).

– Over the last 10 years, director pay has not kept pace with the increase in market value of companies. This is especially true for large-cap companies where, over this period, the median market cap rose 305% (11.8% annually) while median director pay rose 25% (2.2% annually).

– Large-cap companies, which in this study have a median market cap of >50x the small-cap median, pay directors roughly 1.5x what small-cap companies pay, compared to a multiple of 2.7x for CEOs.

FW Cook says that compression at the top of the pay scale is a problem for large companies looking to attract qualified directors and points out how this compression differs from what we see with CEO pay as companies grow.

While I can see that point, I’m taking it with a grain of salt. In my experience, high quality directors are more motivated by intrinsic rewards like reputation, connection, and staying relevant than money. I’ve heard recruiters and board chairs say it’s a red flag if the compensation is what’s attracting the candidate. Plus, with 60-70% of director pay coming in the form of equity that will continue to appreciate, board members at well performing large-cap companies aren’t exactly working for free.

The memo also has this to say about pay caps for directors:

– Prevalence of annual limits on director compensation continues to increase (82% of the total sample versus 79% last year and 67% five years ago).

– Limits on total pay typically range from $500,000 to $1,000,000 and equate to a multiple of roughly 2x to 3x total director pay.

Part of the reason that annual pay limits have become more common is because the Delaware Supreme Court decided several years ago that the entire fairness standard applies to the board’s director compensation decisions. I’ve shared commentary in the past about considering conflicts of interest in setting director pay – and those could be more of an issue if board compensation starts to track CEO pay patterns.

– Liz Dunshee