Corporate Director Pay Rose 4%, but Cash Was Flat

Annual pay for Fortune 500 outside directors hit the quarter-million-dollar mark

By Stephen Miller, CEBS Oct 9, 2015
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Total pay for outside directors at large U.S. companies increased by 4 percent last year, primarily driven by rising stock values, according to Towers Watson’s latest annual analysis of director compensation at Fortune 500 companies. The trend toward greater reliance on equity (stock-based) compensation for board members mirrors a wider trend of linking executive pay more closely with company performance.

The researchers found that:

Median total direct compensation for directors climbed 4 percent last year, to $250,000, an increase from nearly $240,000 in 2013. But the cash component of directors’ pay remained flat.

Total compensation includes cash pay and annual or recurring stock awards. While the median value of cash compensation remained flat last year at $100,000 for the second year in a row, stock compensation value rose 7 percent at the median, to almost $140,000, nearly double the 4 percent increase in 2013.

The average mix of pay remained constant at 56 percent in equity and 44 percent in cash. Still, two out of five companies made a change to one or more core elements of their director pay program.

Large companies continue to embrace stock ownership guidelines and retention requirements for directors; 91 percent of companies now have one or both mandates in place to tie company performance with directors’ compensation.

“For the second consecutive year, rising stock values were the driving force behind moderately larger increases in total pay for outside directors,” Paul Conley, U.S. West division leader for executive compensation at Towers Watson, told SHRM Online.

“The Towers Watson claim of 4 percent for last year’s board member pay increase is fair. I would say between 4 and 5 percent was typical” for board member pay increases last year, commented Matt Skrinjar, product manager and data analyst at ERI Economic Research Institute, a compensation research firm.

ERI recently published its own research report, US Board Director Compensation, based on board director pay at 5,510 U.S. companies. ERI’s researchers found that total direct compensation for board members at its broader sample of U.S. companies was $159,223, while board chairs received $177,190. Total equity, including stock options and restricted shares, represented 62 percent and 56 percent of the total direct pay mix for board members and board chairs, respectively, ERI found.

“Similar to what’s happening with executive pay, company boards and committee members are seeing a higher percentage of their pay depend objectively on company performance,” Skrinjar noted. “Annual cash incentive plans designed specifically for independent directors are becoming more popular. At public companies, equity awards, mostly in the form of full-value stock, were a part of more than 80 percent of director compensation packages.”

Annual Cash Retainers

Compensation components for board directors have unique designs, such as an annual cash board retainer (or fixed fee), in contrast to per-meeting attendance fees. Interestingly, while the overall cash component of directors’ pay remained flat last year, Towers Watson found that the median annual cash retainer for board service at Fortune 500 firms rose significantly (13 percent), from $80,000 to $90,000. In addition:

Over one-quarter of large companies (26 percent) increased their board retainer, up from 21 percent of companies in 2013.

The number of large companies that provided an annual board retainer as the sole form of cash compensation has steadily increased over the last few years, rising from 28 percent in 2010 to 37 percent last year.

“While many companies boosted the annual cash retainer for board service, total cash compensation remained flat, as fewer companies are paying directors on a per-meeting basis—a sign that companies are continuing to simplify their director pay programs,” Conley said. “In short, companies are paying for directors’ overall contributions as opposed to paying for the time they devote to the role.”

He observed, “We continue to see a shift in the approach to cash compensation for directors, moving from meeting fees towards a fixed cash retainer, even as the overall annual cash amounts are relatively flat on a year-over-year basis.”

“As demands and pressures on directors continue to rise, particularly through committee work and ongoing regulatory changes, we expect companies will continue to evaluate their director compensation programs in order to attract and retain the most qualified directors and ensure ongoing competitiveness,” Conley said.

Mercer’s most recent analysis of director compensation programs at 171 companies in the S&P 500 shows that total compensation for a director (defined as chair of the compensation committee and member of the audit committee) increased slightly in 2014 to just more than $263,000. Year over year, cash compensation was flat while equity compensation increased marginally. Retainers and meeting fees were unchanged, as well.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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