Tag Archive: Compensation trends

The New Norm in Director Pay

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NACD Director Compensation ReportLitigation challenging director pay has made headlines over the past 18 months with shareholders alleging that pay is excessive pay or challenging the processes by which pay is set. The reality is, however, that a new norm of modest pay growth has settled in across American boardrooms, according to the Pearl Meyer/NACD 2015–2016 Director Compensation Report.

Elements of Board Pay Remain Steady

The report, co-produced by NACD and the executive compensation consulting firm Pearl Meyer, reveals that over the past five years, median director pay increased annually at a rate of 3 percent to 5 percent per company, while year-over-year pay increased between 1 percent to 5 percent. This steady but incremental trend is attributable to the typical board practice of only suggesting changes in pay every two to three years. Low- to mid-single-digit pay increases are expected to continue for the next several years unless a significant catalyst for change occurs.

In 2015, the numbers rose slightly from the average, save for micro companies, whose directors saw a compensation increase of 9 percent. Pearl Meyer attributes this jump to minor changes occurring in the constituent companies that are surveyed year over year, and to their volatility as high-growth oriented enterprises that quickly exceed the $500 million mark.

Jannice L. Koors, managing director at Pearl Meyer and head of the firm’s Chicago office, noted that pay practices appear to be reverting to those seen prior to the passage of the Sarbanes-Oxley Act of 2002 (SOX). “The pendulum is swinging back to director compensation in the pre–SOX days, when pretty much all director staff was paid the same,” she said. The concept underscores the board’s unity when, in Koors’ words, “something goes bump in the night.” “If all the board members’ feet are going to be equally held to the fire, then is it really appropriate to have differentiation in how the committee members were paid for that liability risk?” she asked.

Use of Cash Retainers Increases, While Pay for Committee Members Is Limited

Another element that has demonstrated statistical prevalence is the rate of cash retainers for directors across companies. Ninety-seven percent of companies offer cash retainers to their boards as compensation for their service. The cash retainer typically makes up 32 percent to 36 percent of total director compensation (TDC) packages. Equity grants also continue to comprise a large portion of a director’s pay package—93 percent of companies offered grants. Companies of all sizes offered equity grants at a fixed dollar value rather than a fixed number of shares. This practice is perceived to better align directors’ stewardship and oversight responsibilities. When these fixed-value equity awards are included in TDC, the number of shares is typically adjusted to each grant date based on the price of the stock to provide an equivalent value each year.

One standout figure in this year’s data emerged in the differentiation of compensation by committee role. Audit committee chairs received the highest level of compensation across company types at a median level of $20,000, with compensation and governance committee chairs receiving progressively less, at $15,000 and $10,000, respectively.

A similar trend is reflected in the median total compensation figures for all committee members, which includes both retainers and meeting fees. However, the prevalence of compensation for committee members decreases with the size of the company. Members of both the compensation and the nominating and governance committees at Top 200 companies—the largest 200 companies in the S&P 500 by revenue—are not compensated at more than half of the companies surveyed, which results in median compensation of zero dollars for these committees when averaged with those that do provide retainer or meeting fees for committee service.

“I don’t know that I would ever see the trends moving to a place where committee compensation goes away across the board for all companies in all situations, because there are some very legitimate reasons where committee pay actually makes sense and plays a role where the workload isn’t even,” Koors said.

Legal Implications Regarding Pay

Three recent court cases that have either been adjudicated or are in process open the door to potentially significant changes in director pay practices.

  1. In an ongoing case being heard in the Delaware Court of Chancery, shareholders of Citrix Systems have accused directors of awarding themselves excessive equity compensation in a pay plan that was ratified by shareholders in 2005. Shareholders claim that directors failed to accurately and fully disclose several details during the process, specifically the amount or form of compensation to be rewarded to the non-employee directors. Additionally, shareholders allege that only five of the 14 peers selected for comparison in the ratified pay policy were true industry peers.

    Directors argued the stockholder ratification defense when seeking to have their case heard under the business judgment rule. The court ruled, however, that the ratified Citrix payment plan was indeed not specific enough, hence disqualifying the Citrix board’s case from being heard under the more deferential business judgment standard.

  1. A case against Goldman Sachs, brought by shareholders before the Delaware Court of Chancery in June, alleged that directors bear the burden of proving the entire fairness of a per-participant limit of 24.75 million shares, which was valued at $2.8 billion when the case was filed. While the same might not be true for Citrix, it appears as though Goldman Sachs based its compensation on a true peer group. A decision is pending.
  1. At Facebook, Chair and CEO Mark Zuckerberg and the board came under fire in 2014 for the process used to ratify director pay. That case, which went to trial under the entire fairness standard, argued that Zuckerberg’s deposition and affidavit of approval of the director compensation plan put forth by his board was not valid, as Zuckerberg was acting for the directors as an interested party and violated the rule that such transactions must be approved by a vote at a stockholders meeting or by written consent. Facebook settled in late January after Zuckerberg’s ratification was deemed invalid by the Delaware Chancery Court, and the social media company agreed to stricter oversight of director compensation.

Koors suggests that all boards take the time to ensure their disclosures accurately and clearly reflect the rationale of the director compensation program, with full highlights of their skills, qualifications, demographic diversity, and details on the nomination and board re-evaluation processes. More robust communication regarding director selection and compensation could help mitigate proxy season disruption, as well as protect against the types of litigation described.

Survey Methodology

Pearl Meyer’s 17th annual survey of non-employee director compensation examines key director compensation elements as collected from 1,400 companies across 24 industries, and derives its findings from proxy and other financial statements that disclose director compensation information for the fiscal year ending between Feb. 1, 2014, and Jan. 21, 2015. Companies were assigned to one of the 24 industries based on their industry classification within Standard & Poor’s Global Industry Classification Standard (GICS). Data for the survey was collected in part by Equilar Inc. Comparisons are made to the Pearl Meyer/NACD 2014–2015 Director Compensation Report. All companies surveyed are publicly traded.

This blog is excerpted from an article originally published in NACD Directorship magazine’s March/April 2016 issue.

Assigning a Value: The Role of the Compensation Committee

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When a board’s compensation committee decides on executive pay, directors can be between a rock and a hard place. Activist shareholders may vote against generous executive compensation packages they feel are not merited, yet attractive pay can be a tool to attract needed talent in an increasingly competitive and global marketplace.

As debates continue on the proper levels of compensation and its regulation, directors need to educate themselves on the best practices and current trends to create packages that are acceptable to both shareholders and executives, while advancing the goals of the company.

We see headlines daily about executive and director compensation. The recent decision of the board of Indian company Tata Consultancy Services’ to increase their CEO’s annual compensation by 67 percent, for example, recently earned a Wall Street Journal headline.

Meanwhile, statewide media are busy tracking any trends and developments they find on compensation issues, usually in a negative light. Recently, the Arizona Republic reported that CEO compensation in the state rose 48 percent in 2010. Iowa’s Des Moines Register also reports that executive pay in Iowa is on the rise. A recent article in the Atlanta Journal-Constitution details the compensation packages for the chief executives at the top 25 public companies in Georgia.

In addition to focused media attention, there are new regulations around compensation. In March of this year, the Securities and Exchange Commission proposed a rule that would require certain financial institutions to disclose the structure of their incentive-based compensation practices. The rule would also prohibit the same institutions from issuing compensation packages that encourage inappropriate risk taking.

How can directors make the best decisions about compensation packages—both for executives and directors? One of the best ways is by looking at best practices and talking to other experienced directors and expert advisors about not only the right mix of equity and cash, but also performance metrics and how to communicate with shareholders about pay packages.

This year’s annual NACD Board Leadership Conference in Washington, DC from October 2-4, will feature a Compensation Committee Forum led by compensation experts from Pearl Meyer & Partners to provide in depth guidance for compensation committees. Attendees will discuss the latest challenges and strategies around executive compensation packages. Additionally, those in attendance will gain expert advice on communication strategies so that company talent is retained and shareholders and C-suites are satisfied.

To register for the NACD Board Leadership Conference, go to nacdonline.org/conference. Early-bird discounts are in effect until July 31. Additionally, directors and executives from NASDAQ-listed companies will save 10 percent on the registration price by entering coupon code OMXSAVE.  To register or ask questions in person, please email registration@NACDonline.org or call 202-572-2088.