In third year of say on pay, trend toward full-value shares in board compensation packages ensures closer alignment with shareholder interests
Despite lots of fuss over executive pay, shareholders don't give equal attention to board members’ compensation. Increases in directors’ pay have slowed somewhat in recent years, but generally they are still being paid fairly well, according to new research.
Mercer's latest study of directors' compensation, which drew from proxy statements filed with the SEC between 2011 and 2013, shows median total direct compensation increased 3.0 percent for directors at S&P 500 companies – the lowest year-over-year change in years. The median cash retainer at the 500 largest companies rose from $65,000 in 2010 to $75,000 in 2012, with the largest increases seen at the 400 smaller companies in the index.
Directors with plum committee assignments are better compensated. Audit committee members are most likely to receive a cash retainer (38 percent did in 2012), while one-quarter of compensation committee members and 24 percent of governance committee members receive one. The average retainer for audit committee members has been unchanged at $10,000 since 2010, while those for compensation and governance committee members have climbed on average by $2,000 to $10,000 and by $1,000 to $7,500, respectively.
What Ted Jarvis, Mercer's global director of executive compensation data, research and publications. finds most surprising is the persistence of certain benefits and perquisites for directors in the face of the intensified scrutiny that senior executives’ perks have received. ‘One would expect that to be true for directors as well, but the fallout from [any greater scrutiny being paid them] isn't evident,’ he says.
Directors have fared worse in terms of meeting fees, which have become less prevalent, according to Mercer's research. Only one-third of directors at S&P 500 companies were paid to attend board meetings in 2012, down from 42 percent in 2010. Among the 100 largest firms, just 30 percent collected meeting fees in 2012. The fee has held steady at $2,000 on average for the last three years. Mercer also notes that as meeting fees become less common, companies are shifting variable pay into fixed retainers. The shift away from meeting fees underscores that how much time one spends on board affairs is less relevant today than directors’ full engagement with the companies on whose boards they serve.
But increased attention to companies’ say on pay proposals begs a key question: has there been an impact on director compensation?
’The increased focus on senior management has created more work for directors and placed more pressure on the decisions they make,’ says Brant Shelor, a partner at Mercer who specializes in executive rewards. ‘This is particularly true for compensation committee members who have direct oversight over senior management pay, and may be asked to play a bigger role in shareholder outreach efforts.”
That’s the main reason for compensation committee pay catching up with that of audit committee members, he says. More broadly, the intensified focus on senior management has heightened pressure to ensure that director pay programs don’t appear excessive. ‘If shareholders perceive that both executive and director pay are very high versus the market, it could raise general concerns that the directors are not effectively fulfilling their duties to act on shareholders’ behalf,’ says Shelor.
But because directors' pay is typically much smaller than that of senior management, it generally invites less scrutiny by shareholders, he says. There is also limited variability built into most director compensation programs. For example, directors’ cash retainers don't adjust with executives’ bonus levels, and the increasing trend toward full-value shares at the 95 percent of S&P 500 companies that include equity in directors’ pay packages ensures closer alignment with shareholders’ interests, he explains.
In light of Mercer's findings, Shelor says boards need to ask some key questions as they consider their compensation:
- Does our board pay reward directors properly for the time and expertise invested, and is this balanced with the appropriate degree of administrative simplicity?
- Is our director pay program likely to attract any negative attention or create financial risks for the company in a say-on-pay (and related litigation) world?
- Does the overall director pay structure provide some stable award value to recognize contributors, while also supporting alignment between directors and shareholders?
Director compensation practices are evolving at a faster pace than in the past. ‘With today's heightened emphasis on accountability, boards should review their pay packages every year to ensure that they reflect not only prevailing pay levels, but the latest thinking on good governance,’ says Jarvis.
