How to Pay Yourself Handsomely

Recent trends in compensation prompted the law firm Gibson, Dunn & Crutcher to issue some new advice to directors on how they should approach paying themselves. A copy of the memo is posted on the Harvard Law School blog.

As boards review their director compensation programs, the partners at Gibson, Dunn & Crutcher recommend that the board or responsible committee:

1. Consider the forms of cash compensation that directors receive. In particular, boards that pay meeting fees should consider whether this continues to be appropriate and whether some or all of directors’ cash compensation should be paid in the form of an annual retainer.

2. Consider whether the mix between the cash and equity portions of directors’ compensation is appropriate and the rationale for the mix selected. In particular, boards should focus on paying a meaningful portion of total director compensation in the form of equity in order to align directors’ interests with those of stockholders.

3. Consider the forms of equity compensation that directors receive. In particular, boards still using stock options should evaluate whether full-value awards are a more effective tool for aligning director and stockholder interests.

4. Consider adopting stock ownership and retention policies. Boards that already have stock ownership requirements or guidelines should consider whether their policies in this area promote meaningful equity ownership. In addition, boards should consider adopting retention requirements mandating that directors hold a specified amount of stock for the full term of their board service.

5. Consider the continued appropriateness of including perquisites as part of director compensation. In addition, boards should evaluate whether specific perquisites are appropriate and reasonable, and the impact that perquisites may have on director independence.

6. Consider the board’s process for evaluating director compensation. Decisions on director compensation should be made at the full board level after review and consideration of all relevant information, including data on market trends and compensation paid by comparable companies.