Are You Paying Directors Enough?
September 20, 2016
A Korn Ferry Hay Group exclusive look at director pay at 300 companies
Director pay may not be changing a lot, but the compensation packages are becoming more complex and unique, according to an exclusive review of 300 companies by Korn Ferry Hay Group.
Now in its sixth year, the report found that the median annual retainer remains at $100,000, the same as last year, but meeting fees are becoming less common and lower. In addition, in recognition of the continued importance of the committee chair roles, the study found that companies are including additional retainers for the so-called “Big 3” committee chairs: audit, compensation, and nominating/governance committees.
The changes appear to reflect evolving philosophies for compensating directors, as companies have shifted the share of components to better steer director behavior.
The Big Picture
The study , the KFHG 300, is based on director compensation data disclosed in proxy statements, for this year’s report those filed between May 1, 2015, and April 30, 2016.
Longer-term trends—such as the fact that far more of the board’s work is generally now accomplished at the committee level—have had an impact on the reapportionment of compensation components.
Top-Line Director Compensation Findings
Median annual retainer unchanged from last year, at $100,000. (The last time the median annual retainer increased was in 2014, when it increased to $100,000 from the 2013 median annual retainer of $90,000.) The overwhelming majority (99.3 percent) of the KFHG 300 companies paid directors an annual retainer in the form of cash and/or equity.
Decreased prevalence and amount of meeting fees. As director pay programs evolve, we continue to see a shift away from providing meeting fees, toward enhancing annual retainers and/or equity compensation. The percentage of the KFHG 300 that paid directors a board meeting attendance fee dropped from 21 percent to 16.3 percent, with the median board meeting fee stable at $2,000. Meanwhile, 21.7 percent of companies paid a compensation committee meeting fee of $1,500 (down $500 from last year), 22 percent of companies paid a median fee of $2,000 for audit committee attendance (same as last year), and 20.7 percent of companies paid a median fee of $1,500 for nominating/governance committee attendance (down $225 from last year).
A premium for committee chairs. In recognition of the additional responsibility and time commitment, virtually all the KFHG 300 paid an additional retainer to committee chairs: 96.7 percent paid their audit committee chair a median retainer of $25,000 (versus $21,000 last year); 95.7 percent paid their compensation committee chair a median retainer of $20,000 (unchanged from last year); and 92 percent paid their nominating/governance committee chair a median retainer of $15,000 (unchanged from last year).
Few committee member retainers, except for audit. Perhaps a reflection of the added time commitment and specialized expertise, the percentage of the KFHG 300 companies paying a retainer to audit committee members ticked upward from 40.3 percent to 41 percent, while the median retainer increased from $10,000 to $12,000. Twenty-six percent of companies paid a compensation committee retainer, a median retainer of $10,000 (unchanged since last year, up one percentage point from the previous year). Companies were least likely to offer retainers to members of their nominating/governance committees, 24 percent of companies, with a median of $10,000 (up from $9,000 the previous year).
Trend away from stock options, toward restricted stock, in long-term incentive mix. Once a popular long-term incentive intended to link directors’ interests with shareholders, now only 7.7 percent of the KFHG 300 granted directors stock options, versus 8.3 percent the previous year. The median value of the options decreased as well, from $81,000 to $80,004. Restricted stock/RSUs continue to be the most prevalent means of rewarding directors. The percentage of the KFHG 300 companies issuing restricted stock/RSUs increased (from 72.3 percent to 79.7 percent), and the median value increased (from $144,000 to $150,000). In summary, the data show that 81 percent of the companies granted directors some form of long-term incentive compensation (up from 74.3 percent the previous year), while the median value of these long-term incentive packages remained steady at $150,000.
Total direct compensation (TDC) increased slightly. Depending on committee membership and role, median total direct compensation of a KFHG 300 director was 1) $281,250 (versus $275,000 last year) if that director was an audit committee chair or member of the nominating/governance committee; 2) $277,750 (versus $266,875 last year) if that director was a compensation committee chair or member of the nominating/governance committee; and 3) $265,000 (versus $255,000 last year) if that director was a member of the audit committee and a member of the compensation committee. These conclusions were based on our assumptions of typical directorships.
For boards that wish to continue to compete for and retain the best directors, the KFHG 300 should prove a useful reference tool. Stay tuned for additional director compensation trends, including how leading boards are compensating board leadership.