As Dodd-Frank continues to influence the activities of corporate America, board directors have taken on greater responsibilities. Due to an increased focus on shareholder engagement and outreach, the effort to hire board and executive talent, and the ability to effectively shape strategies, board members have seen an increase in compensation in recent years. In fact, median retainer for S&P 500 directors increased by 16.8% in the last five years, reaching $233,600 in 2014. (See Graph 1 for more details, Source: Equilar.)
As directors occupy the precarious position of setting their own compensation levels, potential consequences loom if they fail to be transparent about what they choose to award themselves, particularly with the increased compensation they are earning.
As a result of this changing landscape, director pay has been placed under the microscope. Activist shareholders have gone so far as to litigate regarding excessive director pay, emphasizing the importance of setting reasonable limits on board compensation levels. The spotlight further brightens on directors not only because they make pay decisions for themselves and fellow members, but also because they decide on premiums paid to individuals in leadership and committee roles. Ultimately, directors possess the difficult task of ensuring their board members are compensated properly while addressing the interests of shareholders.
Similar to executive pay, director compensation is directly tied to shareholder interests. Consequently, there has been a rise in equity awards for directors, and pay-offs are targeted with an eye toward long-term returns.
Overall, cash has been the most common component of director retainers. In 2014, 97.8% of S&P 500 directors received some portion of their retainers in cash form, with the median value of those cash awards being $80,000. On the other hand, options have been on a steady decline over the last five years, with just 14.5% of companies granting options in 2014. As a whole, median option grant values decreased from 2010 to 2013, maintaining the lowest median among pay components offered to directors.
Board members holding leadership positions are generally compensated more for their increased responsibilities, and non-executive board chairs earned 65.9% higher than the median for all S&P 500 directors at $387,500 in 2014. Lead directors earned $265,000 at the median.
With the consistent rise of shareholder engagement, board members are more frequently being called into service throughout the year than ever before, which is a direct cause of rising retainers. In conjunction, board members are less likely to receive incentives to attend board meetings on a one-off basis and, as a result, meeting fees have experienced a steady decline among S&P 500 companies, reaching a new low of 23.2% in 2014, a 43.9% decline since 2010.
On a sector-basis, board fees were most popular in the utilities sector, at 38.7%, while lowest in the consumer goods and technology sectors at 15.3% in both sectors. (Graph 2, Source: Equilar) Although the overall use of board meeting fees has decreased in popularity, median fee values have remained constant over the last five years at $2,000.