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

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.

In recent months at Korn/Ferry International, we have seen a significant shift among forward-thinking boards that reflects an evolution of the role. They no longer are appointing a board leader merely to satisfy requirements; they seek to leverage the role for maximum benefit.

For leading boards, appointing an independent board leader means far more than simply ticking the “yes” box on a compliance checklist. They recognize that the right board leader—one selected according to a competency-driven process tailored to the needs of the specific board —can add significant value to the board. And they understand the paramount importance of the right “chemistry” with both the board and the chief executive, since this individual is simultaneously a member of the board team and a sounding board for and confidant to the CEO. It is a role that not everyone can perform well, and finding the right match is critical to overall board effectiveness.

In 2009, Delphi Chairman Jack Krol and I convened a roundtable of 10 non-executive chairmen/lead/presiding directors of some of the most prestigious companies in the U.S., including Johnson & Johnson, Pfizer, UTC, Tyco International, Motorola, Ingersoll-Rand, NCR, Ford Motor Co., Comcast and Home Depot. We asked participants to identify some best practices related to the increasingly visible and important role of lead director. The chief conclusions:

• Assume the worst. The period during which the board leader serves may be one of rough going or smooth sailing, but all board leaders must be capable of dealing effectively with the most challenging scenarios. A board should operate under the assumption that it will have to deal with at least one crisis, and select its
  leader with that criterion in mind.
• Create a formal position and candidate specification. The spec should define the role and responsibilities, such as chairing executive sessions and board meetings; presiding over the board evaluation process; and ensuring a robust succession plan is in place for the CEO, key managers and the board itself.
• Make sure it’s personal. It is the hard-to-quantify personal characteristics that make the difference between competent and great board leadership. Always assess factors such as the commitment and skill required to engage other directors in discussion and convey their views; stature as well as social and diplomatic skills; the ability to build trust and provide honest counsel to both board members and management; and unassailable professional integrity and an expectation of the same from fellow directors and management.
• Be thoughtful about term limits. Views on the appropriate term for a board diverge, but the term should be defined with explicit performance requirements. A three-year, renewable term provides the board leader time to demonstrate progress against those objectives and ensures some performance assessment by the board at the end of the leader’s first term.
• Don’t under-compensate. Board leaders have special responsibilities, which require additional time and effort compared with other board members, and provide additional value. Therefore, some boards are considering significantly increasing both the cash retainer—up to double the customary—and equity component of board leader compensation.

The independent board leader is simultaneously a member of the board team and a sounding board for and confidant to the CEO.

While initially driven by requirements designed to ensure board independence, the board leader position is now recognized as a potential source of value. Consequently, the role is evolving into a highly professional one with best practices for selection, compensation and succession coming into focus.

A great board leader can contribute mightily to forging an effective team of directors and is the best insurance a board can have when the inevitable crisis hits.

Dennis Carey is vice chairman, Board & CEO Services, for Korn/Ferry International.