Friday November 21, 2014

Compensating Non-Executive Board Leaders for Time and Value

Compensation of non-executive board leaders is lagging behind the increasing prevalence and importance of their roles in the boardroom.

The position of non-executive board leader has come a long way in a relatively short time, from one that was employed by only a few companies a decade ago to one universally mandated by listing requirements today.

Increasingly, the role of non-executive board leader is viewed as the linchpin of a successful board and CEO relationship, and while a series of best practices have begun to emerge regarding how to leverage the non-executive board leader role, board leader compensation is one area in which there is a notable lack of consensus. In our recently released Korn/Ferry Market Cap 100 board study, we found that even among the 88 boards that do not rotate the leadership role, 40 percent provide no additional cash retainer for the independent board leader. Of those that do, the amount varies widely, from a median of $87,000 for those designated non-executive chairmen to a median of $25,000 for lead directors and $17,500 for presiding directors. Only a few companies are still debating the question of paying additional equity.

Left to right: Dennis Carey and Stephen P. Mader

Left to right: Dennis Carey and Stephen P. Mader

Compensation is a symbol of how board leaders are valued by the board.

Serving as the independent board leader of a large public company board is often a highly demanding and time-consuming proposition, and those who take on this responsibility are likely to be among the most experienced and respected directors on a board. It is not easy to find someone with the right combination of personal and professional skills and experience, as well as the motivation required to take on this job. And while board leaders do not serve for the money, the fairness of compensation is a symbol of how the role is valued on a board.

We see three current approaches to board leader compensation:

  1. Pay the board leader like any other director. Some boards pay no premium and regularly rotate the role. This sends a message that all directors are equal, but is an indication that these boards may not fully recognize the value of the board leadership role, as a leader among peers and a regular liaison with the CEO. Moreover, in our view, it is unfair—and likely to be perceived as such—not to properly compensate the board leader for assuming these additional duties.
  2. Pay the board leader on a par with key committee chairs. This approach recognizes that some additional effort is expended and value contributed but, if the role is fully leveraged, it misses the point that serving as board leader may require significantly greater effort than serving as a committee chair. This demands that an effort be made to delineate what is required to perform the role well, the time and effort that it requires and the role’s effect on board performance.
  3. Dramatically increase board leader pay, in line with significant responsibilities. To appropriately compensate board leaders, given their stepped-up time commitment and duties, many boards are eschewing old formulas for board compensation and applying one specifically geared to the board leader role.

Depending on specific circumstances and responsibilities, it may be appropriate for the independent board leader to be paid substantially more, as is now being done with some non-executive chairmen in companies such as Walgreens, UnitedHealth Group and Intel. And, while the title of lead or presiding director may appear less lofty than a non-executive chairman title, we have seen little difference in the actual role, regardless of the title. We believe that the third approach is the way of the future when it comes to compensating independent board leaders. Boards seeking to attract and retain the best directors will factor in the wealth of experience a board leader brings, as well as the complex and sensitive role he or she plays as facilitator, board ambassador and coach and confidant to the CEO. Board leaders themselves will likely feel that they are not in a position to advocate for their own compensation, so it is the full board’s responsibility to ensure that compensation for non-executive board leaders is commensurate with their proportionately greater responsibilities.

Dennis Carey and Stephen P. Mader are vice chairmen at Korn/Ferry International.

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