Director Pay: Slow Evolution in a Changing Environment
While the essentials of director pay remain steady, interesting changes are happening at the margins. Review the findings of the forthcoming Pearl Meyer/NACD 2016–2017 Director Compensation Report in this condensed article from the March/April edition of NACD Directorship magazine. Members may read the full article, including charts, here.
Continued slow growth in what boards pay their members suggests that “director compensation is evolutionary, not revolutionary,” said Jannice L. Koors, managing director at compensation consulting firm Pearl Meyer and head of the firm’s Chicago office. Director pay has, in other words, changed little over time.
Data from the Pearl Meyer/NACD 2016-2017 Director Compensation Report show that median director pay at public companies increased by 3 percent over the previous year. That brings median total compensation for individual directors to $191,440 for all firms, from micro-sized to the top 200 public companies. Median pay across all companies studied in the previous year’s report was $186,610.
While the report found no about-faces or surprises in overall median director compensation, a closer look at what is happening in the margins reveals continued evolution.
Pay Growth Aligns With the Stock Market
Directors have seen steady increases in pay in recent years as the stock market has continued to recover from the 2008 global financial crisis. The link between director pay and the stock market has strengthened as boards have offered directors less cash and more equity.
When Pearl Meyer published its inaugural director compensation report with the NACD in 1999, less than 25 percent of the largest 200 public companies in the United States included stock in their director compensation plans. That percentage had grown to 50 percent by 2002. In this year’s survey, 93 percent of the companies indicated they include some type of equity in their mix of director pay.
With that mix of pay elements, a strong stock market means bigger paychecks for board members. And that is how it should be, according to the Report of the NACD Blue Ribbon Commission on Director Compensation: Purpose, Principles, and Best Practices. The commission, led by Harvard Business School Professor Robert B. Stobaugh, recommended the following: “Boards should pay directors solely in the form of equity and cash—with equity representing 50 to 100 percent of the total.”
Changes in the Political and Regulatory Environments
The political and regulatory environments can stimulate strong performance among companies traded on the U.S. stock exchanges. Attempts to forecast what the next few years will look like for corporations prove difficult.
The director compensation report notes that President Trump’s administration and a Republican-controlled Congress could adopt protectionist policies that would likely refocus business activity on the United States and away from some international trading partners.
The president’s promises to help businesses by deregulating, however, have produced some level of optimism in corporate America. JPMorgan Chase & Co. in February published results of an online survey showing that more than 75 percent of middle-market business executives expect the policies of the Trump administration and the Republican-controlled Congress to positively affect their businesses because of expected tax reform and fewer regulations.
Koors noted that the current administration feeds the populist sentiment. That environment could call into question how year-over-year growth in director pay aligns with—or outpaces—employee pay increases. “There will continue to be a focus on income inequality and pay gaps,” said Koors. “Even if there’s not regulation around it, boards will continue to have to be sensitive to the broader stakeholder groups, not just the shareholders.”
Committee Pay and Workload
Seventy percent of companies surveyed for the report provide retainers or meeting fees to directors serving as members of a standing committee. However, pay differs depending on which committee the director serves.
Koors said that committees whose workload grew as a result of more regulation have tended to see increases in pay for members. When Enron’s corporate failure led Congress to pass the Sarbanes-Oxley Act of 2002, for example, the law’s regulations to protect shareholders from fraudulent accounting by corporate leaders meant greater oversight responsibilities for the audit committee.
This year’s director compensation report shows that, across all firms, audit committee members earn a median of $7,500 above their base pay for board service, while audit committee chairs drew $20,000.
Similarly, passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act took aim at executive compensation, and subsequent rules, such as say on pay, led to greater responsibilities for—and attention on—the compensation committee. Increased attention on high CEO pay and disclosures meant to improve pay transparency have also translated into more work for compensation committees, and more work should mean higher pay.
Median retainers and meeting fees for compensation committee members, above their standard director pay, totaled $5,000 across all firms, according to the report. Compensation committee chairs earned $15,000 for their service.
Koors added that heightened attention on issues such as increasing board diversity and improving succession planning could presage a workload increase for nominating and governance committees. Members of that committee received a median of $2,500 above their standard pay for board service across all firms, while chairs received $10,500, the report noted.
“Have we reached the point where every committee has an increased workload? Do we go back to pre–Sarbanes-Oxley [when all committee service resulted in the same level of extra pay]? We started to see a little of that in the data, but the most prevalent practice is still differentiation in pay,” Koors said.
Connecting Director Pay to Board Turnover
In addition to director compensation adapting to the political and regulatory environment, the report notes that director pay could be used as a mechanism to spur board turnover.
The 2016–2017 NACD Public Company Governance Survey finds that board turnover slowed last year, with just 67 percent of respondents indicating that their boards had added at least one new director in the past 12 months. That was down from the prior year.
Most boards deliver the biggest portion of pay to directors as equity. But many boards model their director compensation plans on those of executives, which seek to retain senior managers.
Many director compensation plans are similarly set up so that a director forfeits any unvested equity if he or she retires earlier than expected. Common practice is for directors’ equity grants to vest immediately or after one year, the director compensation report states, but companies with vesting periods longer than one year could inadvertently encourage directors to stay on a board for which their skills are no longer applicable in order to avoid forfeiting unvested equity.
“Make sure your director-award provisions allow the director to divest equity at the time of retirement,” Koors said. Doing so could help the company adapt to changing expectations around board turnover.