Board Compensation Up 7% at Midmarket Firms

Increasingly, small public companies use stock options for directors' comp

By Stephen Miller, CEBS Jun 17, 2011

Board of director pay for U.S. middle-market companies rose 7 percent from 2009 to 2010, according to an analysis of 2011 proxy statements. The change reflects the increased responsibilities, time commitment and regulatory issues—such as the Dodd-Frank Act—that boards face. These factors, coupled with a rebounding stock market, prompted companies to increase directors' pay on average to $110,155 in 2010, up from $102,809 in 2009, according to a study by actuarial and consulting firm BDO USA, LLP.

The study report, The BDO 600: 2010-2011 Survey of Board Compensation Practices of 600 Mid-Market Public Companies, analyzed proxy statements filed between June 2010 and June 2011.

Much of the increase in board compensation was attributed to a greater use of full-value equity vehicles, allowing the recovering stock market to add to directors' compensation growth overall. At small midmarket public companies, directors' pay was weighted more heavily toward stock options than at larger firms.

Differences by Industry

The analysis identified industry as the most important factor in benchmarking director pay in the middle market. Compensation by industry ranges from $50,000 for banking directors up to $149,000 for technology directors. Boards in the technology and energy industries consistently outperformed their peers when it came to pay, ranking as the top two industries since 2008. These industries are likely to remain some of the most highly compensated because of continued high investor interest and high demand for seasoned talent, according to the study.

On the other side of the spectrum, banking and financial services retained their position at the bottom of the list, attributable to continued scrutiny and the “leveling off” effect of companies scaling back equity compensation grants in light of their historical grant practices and current market position.

“Companies are shifting away from cash compensation in favor of equity vehicles, continuing to focus on pay for performance while at the same time providing a level of cushion for attracting and retaining the most qualified board members,” said Randy Ramirez, director in the compensation and benefits practice at BDO. “Throughout the recession, director pay did not match the significant increase in responsibility and commitment that most middle-market boards had to take on. Our analysis shows that companies are now in a better position to remedy that.”

Year-over-Year Compensation for Board Directors, by Industry

2010 Average

2009 Average

Median Change*









Health care




Real estate












Financial services-nonbanking




Financial services-banking




Percent change was calculated at the median to exclude outliers.

Source: BDO USA, LLP.

Further Findings

Additional highlights from the study include:

  • Directors at large midmarket health care companies ($650 million to $1 billion in revenues) received the highest compensation overall. The complexity of doing business in the health care industry increased substantially in the past two years. With systemic changes affecting such things as the composition of private practice, integrated system care and regulatory changes, health care companies have increased full-value and stock option grants significantly to attract and retain the most qualified directors. In response, directors in large health care organizations are averaging $205,576 in total annual compensation, substantially higher than any other group.
  • Real estate companies focused on stock options. While more than 80 percent of the companies in the real estate industry do not grant stock options regularly, the remaining 20 percent increased their grants substantially, more than doubling the value on average. This is especially notable because the value of stock options for half the industries studied (energy, banking, health care and retail) decreased. The increased use of stock options among real estate firms to compensate directors can be attributed to the emphasis on director pay alignment and the view that the industry is starting to turn the corner.
  • Cash was king, and equity took back seat for bank directors. Largely because of increased scrutiny and banks’ desire to level off their equity grants, banks favored cash compensation strongly for their boards. Cash made up 72 percent of their pay mix, the highest of any industry and significantly above the average 46 percent. Consequently, their full-value stock compensation was the lowest (27 percent) of any industry vs. 54 percent on average for all industries.
  • Small bank director pay trumped larger peers. Going against standard compensation trends, the smaller the bank, the higher the pay for directors. At $72,981, small-bank directors fared much better than their medium-sized ($45,505) and large ($36,163) middle-market peers. In all other industries the opposite was true—pay increased with the size of the company. This is consistent with the public’s perception that big banks have not been forthcoming with their operational issues. While this might or might not be true, according to the study, increased confidence in the soundness of small community and regional banks was linked to an increase in retail deposits, which gave small banks more leverage to attract and retain key boardroom talent.
  • Pay mix varied by company size. The economic turmoil of the previous three years had a big impact on larger middle-market companies ($650 million to $1 billion in revenues), providing the catalyst for companies to renew and discover their competitive advantages. With this in mind, it was not surprising, the study noted, that large middle-market companies favored full-value stock in 2010; it comprised 42 percent of their directors' pay mix.

Small companies, on the other hand ($25 million to $325 million in revenues), benefited from their size by being able to implement changes in their operations rapidly, which resulted in increased company performance from the previous year and an influx of cash.

As a result, small companies were weighted more heavily toward stock options, with 23 percent of their directors' compensation residing there vs. 17 percent for medium ($325 million to $650 million) and 16 percent for large companies.

In general, compensation packages reflected the reassessment of and changes to overall operations. Companies that were awash in cash sent the message that directors' pay will be linked more closely to the company’s long-term performance.

Stephen Miller, CEBS,is an online editor/manager for SHRM.​


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