With the spotlight cast primarily on the pay packages of chief executive officers (CEOs), compensation trends for board directors were set aside. However, in recent years, and due to the fact that directors set their own pay, shareholders have been paying closer attention.
A recent Equilar report, featuring commentary from Meridian Compensation Partners, analyzed the various trends in director pay and how boards construct pay packages. The study examined companies across the Equilar 500—the largest U.S. public companies by revenue.
Similar to the rise in compensation for named executive officers (NEOs), there has been a rise in director pay. Over the course of five years, from 2014 to 2018, median annual retainers for directors rose from $225,000 to $260,000 (Figure 1). “Particularly in recent years, the board of directors’ mission has increasingly focused on oversight of management,” said Mike Rourke, Senior Consultant at Meridian Compensation Partners. “As this has evolved, so has director compensation strategy.”
Diving further into individual industries, the utilities sector saw a large spike in median annual retainer. Formerly the sector with the lowest median annual retainer in the first year of the study, the median retainer rose from $200,000 to $250,000, a 25% increase over five years (Figure 2). Over the course of the five-year study, the healthcare sector has remained the sector with the highest median annual retainer. With a rise in median retainer from $265,000 to $300,000, this 13.2% increase maintains the sector’s position. The basic materials sector saw the smallest increase in median annual retainer. With growth from $250,000 to $270,000, this sector saw a rise of only 8%.
“Particularly in recent years, the board of directors’ mission has increasingly focused on oversight of management.” –Mike Rourke, Meridian Compensation Partners, LLC
For board leadership, these figures are even higher. Due to increased responsibilities and commitments to the board, compensation is justifiably higher. For non-executive chairs, median retainers rose by 9%, from $400,000 in 2014 to $436,000 in 2018. Premiums for non-executive chairs also rose by 6.7% from $164,000 in 2014 to $175,000 in 2018. For lead directors, the rise in pay was more apparent. Lead directors saw a 19.6% increase in median retainers, from $255,000 in 2014 to $305,000 in 2018. While lead director premiums increased over the five-year period by 20%, this figure only rose from $25,000 in 2014 to $30,000 in 2018.
Similarly, committees have a greater involvement in the board’s actions and decisions, and thus receive a separate retainer. In the five-year period, committees have seen an increase in median retainer prevalence (Figure 3). Governance committees saw an increase of 17.6% from 2014 to 2018, with 33.4% of governance committees in 2018 paying a member retainer. However, audit committees have consistently had the highest frequency of member retainers, with 48.1% of audit committees in 2018 paying member retainers. This trend can be expected to continue, as committee members have more responsibilities and risk involved with their duties than do non-committee members.
Despite there being an increase in retainer fees, the prevalence of meeting fees has declined. While 20.6% of boards paid meeting fees to directors in 2014, 2018 saw a drop to only 7.4% of boards (Figure 4). This 64% decrease in five years may be indicative that meeting fees may be a thing of the past. While the utilities sector previously had the highest occurrence of meeting fees in 2014 with a 38.5% prevalence, in 2018, only 3.7% of boards paid meeting fees, the biggest decrease across sectors at 90.4%. The healthcare sector had the lowest occurrence of meeting fees in 2018, experiencing an 85.7% drop since 2014.
Because retainers are increasing and meeting fees are decreasing, it may be that shareholders are more interested in a base salary for board members rather than providing an incentive to attend individual meetings. This is further evidenced by the decreased prevalence of performance-oriented pay, such as a high rise in equity vs. a slow roll in options. Evidently, shareholders are demanding from the board of directors the same that they demand from the C-suite—results. But for directors, pay for performance may not be the best route for compensation, instead electing a model that rewards directors for their industry knowledge, commitment to the role and increasing demands.
According to Rourke, large companies benchmark director pay annually, and in order to remain competitive in a field with limited flexibility, pay packages must remain on par with peers. Furthermore, because pay packages are tied to company revenue, as well as more demands and responsibilities placed on directors, pay will continue to rise. Overall, the rise in director pay can be expected to become the norm, and the tracking of board compensation may be essential to attract top board talent.
Daniella Gama-Diaz is Associate Editor for C-Suite.