March 22, 2022
March 22, 2022
Hybrid working environments. The Great Resignation. Supply chain struggles. Inflation. And now, geopolitical uncertainty caused by the war in Ukraine. With the explosion of these new areas of concern, and the additional time board members have had to dedicate to address them, one might think that director pay would increase in kind.
Not so: median total direct compensation, or the total board compensation plus total committee compensation, inched ahead 3 percent year over year. From another angle, this is understandable. At a time when executive pay is seen as outsized, with certain lawmakers and regulatory leaders calling for limitations on such pay, directors must also be vigilant in their approach to their own compensation, especially as the US Securities and Exchange Commission (SEC) and other stakeholders are paying increased attention to director engagement and the board’s role and responsibilities.
This and other director pay metrics were recently published in the 2021–2022 NACD Director Compensation Report, produced in collaboration with Pearl Meyer. Main Data Group collected the data from the SEC filings of 1,400 public companies in 24 industries for the fiscal year ending between Feb. 1, 2020 and Jan. 31, 2021. Across the companies studied, there were approximately 300 businesses each in the micro, small, medium, and large size groups, and 200 businesses in the top 200 (from the S&P 500) size group. Below are further key trends from the report.
Although median total direct compensation increased by 3 percent year over year across company sizes, micro-cap companies, with $50 million to $500 million in revenue, saw a 7 percent increase to $133,171 in median compensation and companies among the top 200 saw a 1 percent increase to $309,773. Micro-cap companies saw no change in compensation the year prior, perhaps accounting in part for the largeness of the latest bump.
Micro-cap companies also stand out from the pack as they belong to the only size category that delivers less than 50 percent of director compensation through equity, delivering only 47 percent this way. Small, medium, large, and top 200 companies—often the more established public companies—all offer director compensation in the form of at least 50 percent equity. This is a market and NACD best practice. In recent years, micro and small businesses have been trending toward increasing the ratio of director pay delivered via equity to align the board with the long-term interests of company shareholders.
Board meeting and committee fees also remain more popular at smaller companies than large, with micro-cap firms offering 4 percent of compensation in the form of board meeting fees and 9 percent in committee fees, and top 200 firms offering 1 percent in board meeting fees and 4 percent in committee fees.
Overall, the prevalence of board meeting fees has drastically declined over the past decade. In the latest study, only 17 percent of all companies paid directors board meeting fees; in 2011, 61 percent of micro-cap and 31 percent of top 200 firms compensated board members this way. This decline was only accelerated by the onset of the pandemic in 2020 as boards saw increases in the amount of work expected of them and of unofficial meetings and communication between directors outside of board meetings. The prevalence of committee meeting fees saw an overall decline of 2 percent from the prior year’s study, as well. In general, this points to the continuation of a trend of simplification in director compensation programs.
Beyond the three standing committees, 23 percent of companies in the study have executive committees and 14 percent have finance committees. When it comes to overseeing less traditional subject areas, 12 percent of top 200 companies have environmental, social, and governance (ESG)-related committees. Only 2 percent of micro-cap firms and 3 percent of small companies have the same. Not all smaller businesses will formalize their ESG oversight by creating a separate committee; they could very well be overseeing such issues at the full-board level or within the scope of a standing committee. However, smaller companies without a dedicated committee and that do not oversee ESG at the board level should not think themselves “too small” to dedicate resources to ESG programs or to consider ESG a top priority.
Meanwhile, across the board, 96 percent of audit committee chairs receive chair-specific pay, 93 percent of compensation committee chairs receive this pay, and only 87 percent of nominating and governance committee chairs do. In addition, median committee retainer compensation is highest for audit committee members ($10,000) and lowest for nominating and governance committee members ($6,000). This may reflect a tendency of boards to add new areas of oversight to the audit committee’s responsibilities under the umbrella of risk and strategy, as well as a general continued emphasis on traditional board responsibilities over newer, more “social” ones.
Director demographics (gleaned from the SEC filings) reveal that there was little change in the median age of directors, which is 64, despite cybersecurity, human capital, and other issues important to the board increasingly demanding that people with such expertise—including sitting executives and younger digital natives—serve on boards. When it comes to gender diversity, however, 41 percent of boards studied have three or more women directors compared to 35 percent a year earlier. In addition, 94 percent of organizations have at least one woman director. This follows on the heels of the SEC in 2021 approving Nasdaq’s board diversity listing rule that mandates board diversity disclosure for companies listed on the exchange and that such companies have, or explain why they do not have, a minimum of two diverse directors. Though listed companies are not required to have, or explain why they do not have, at least one diverse director until mid-2023, the reporting requirements go into effect this proxy season. While boards seem to be migrating director compensation and demographics toward better alignment with stakeholders, the pace of change is slow. Entering a new phase of the pandemic, and given the potential upheaval of the global economy from the fallout of the war in Ukraine, boards must continue to consider flexibility and accountability for new and pressing issues in designing governance structures and director compensation plans.
NACD: Tools and resources to help guide you in unpredictable times.