Director pay growth slow but caps needed

Equilar’s latest report, Director Pay Trends 2016, finds that the median annual retainer for directors in the S&P 500 has increased by 17.1 percent from $205,000 in 2011 to $240,000 in 2015, a growth rate of less than $10,000 a year. 

At the same time as this modest growth in total retainers, however, the make-up of the pay package has changed, shifting away from stock options and stock awards to restricted stock units (RSUs). The proportion of the package represented by RSUs has grown from just over half in 2011 to more than three fifths in 2015. Meanwhile, stock options have fallen from around a quarter of the package to an eighth. Options still represent about a third of pay in the healthcare sector, however.

Growth in retainers has been similarly modest for chairs and lead directors: non-executive chairs have seen an increase in their median annual retainers from $350,000 in 2011 to $396,500 in 2015, and lead directors received a median of $240,000 in 2011 and $275,000 in 2015. While key committee chairs receive ‘about twice as much as non-chair members’, in the case of audit and compensation committee chairs, increases in the last couple of years have been substantial. 

The median audit committee chair retainer did not increase at all between 2011 and 2014, but has grown by 25 percent ‒ from $20,000 to $25,000 ‒ in 2015. The median compensation committee chair retainer has increased by 33.3 percent between 2013 and 2015 and now stands at $20,000. Across industry sectors, median retainers have generally risen by similar amounts over the last five years, except for directors on utilities boards, where the median has grown by almost a third over this period, from a lagging position to a still lagging position behind most industries. 

While the report notes a continued decrease in the practice of paying meeting fees, there is still a comprehensive analysis of these payments at the end of the report. Both board meeting fees and committee meeting fees have fallen in prevalence in the last five years from around a third to around a fifth, with significant decreases across all industries.

The vast majority of stock awards and RSUs vest in a single year and the numbers vesting over longer periods have fallen over the last five years. Indeed, the proportion of companies where stock awards or RSUs are deferred until a director leaves the board or retires has also fallen, from 29.1 percent to 27.1 percent. This change is purported to help directors make neutral decisions that might affect the company negatively in the short term. While not included in the report, the practice of having stockholding guidelines for non-executive directors is very common and would seem to play into a more long-term viewpoint.

Meridian Compensation Partners, which provided additional commentary for the report, notes the new trend in suing directors over decisions they make regarding their own pay. Recent cases have found that non-executive directors are not ‘disinterested parties’ when establishing their own pay and are thus not protected under the business judgement rule. Decisions must therefore be subject to the stricter ‘entire fairness’ doctrine to show that pay levels are appropriate. 

As Meridian notes, however, the impact on pay levels themselves has been minimal, while the number of caps on either equity awards or total retainers, introduced to discourage litigation, has increased markedly. Meridian estimates that only around a third of companies have amended plans to introduce caps but, as more come up to be reapproved by shareholders, this number will increase. ‘When limitations are established, they are typically set at a level that is two to three times the total current equity awards,’ the company says.

Equilar has also published a blog that compiles a list of the 20 highest-paid boards in the S&P 500. These top 20 boards all cost more than a total of $5 million, with the most expensive board costing $18.5 million at Regeneron Pharmaceuticals, compared with an overall median total for the S&P 500 of $2.7 million.

Median pay figures for individual directors even on these very costly boards, in most cases, is often not far from the overall median for the S&P 500 of $270,000. This is because the total cost of the board is being increased by one or two individuals with very high levels of compensation. For example, Equilar finds that the highest-paid individual director in the whole sample is Donald James of Vulcan Materials, who received $8 million in 2015, the lion’s share of the total board cost. By contrast, median pay for directors on Vulcan’s board is $274,601, very close to the S&P 500 median. James, of course, is not a typical director, having transitioned from executive chairman to non-executive chairman in 2015.

Only two companies have more than one board member among the 20 highest-paid directors. Directors at Regeneron and Vertex Pharmaceuticals account for 12 out of the top 20 positions. Nine of Regeneron’s directors have been awarded more than $2 million in total compensation, while three Vertex directors have received compensation of around $1.5 million. The blog does not comment on this but, while the stock price for both companies has fallen sharply in 2016, growth has been astronomical during the last five years. As most of the pay for these directors comes in the form of equity, with set numbers of stock options for directors at both companies according to their proxy statements, such a high level of pay is inevitable. 

These are precisely the situations directors must guard against if they want to avoid the kind of litigation discussed above. Indeed, the board at Regeneron has reduced the set number of stock options annually awarded to directors in each of the last three years. At Vertex, the board has gone further and switched from a set number of options to a set value for option and RSU awards. As this new type of award is worth $550,000 annually, Vertex’s director pay will reduce very significantly in 2016.