While 2010 board pay levels generally tracked corporate performance, the portion of director pay provided in equity is growing, apparently in response to the market recovery. Total growth in board compensation ranged from a five-percent increase at the very largest U.S. companies to a 20 percent jump at the smallest firms studied, according to the recently released NACD Director Compensation Report 2010-2011, produced in conjunction with Pearl Meyer & Partners.
The director compensation report examined the pay programs at 1,400 companies with revenues of $50 million to more than $10 billion.
Cash vs. Equity
Considering the rebound in the stock market, it is not surprising that the median cash/equity board pay mix among all companies in the study shifted toward equity compensation.
Observes Pearl Meyer & Partners Managing Partner Jannice L. Koors, “This is a trend that started several years ago, and we continue to see it migrating. Most director compensation trends start in the Fortune 200 and trickle down.” In every revenue category but the Micro companies, more than 50 percent of board compensation was provided in the form of equity, a key NACD governance recommendation.
The Micro companies reported that, at median, equity comprised only 44 percent of board compensation, an increase from the 35 percent that was reported last year. As has historically been the case, cash accounted for the greatest proportion of total compensation at the Micro companies, and was the smallest proportion of total pay at the larger companies. Only 40 percent of the Micro companies reported paying a majority of board compensation in equity, up from 31 percent last year; prevalence among all other size categories increased by 10 percent or more. In each category, prevalence reached a three-year high, with 77 percent of the Top 200 companies paying at least half of board compensation in equity.
While many companies permit directors to exchange the cash retainer for additional equity, such retainers are treated as cash compensation in the data unless the proxy states such exchanges are mandatory.
A shift…in equity vehicle grant practices away from stock options and toward full-value awards has occurred across the broader market, regardless of company size or industry.
Although all size categories favored full-value awards over stock options, smaller companies reported a higher prevalence of stock options relative to the larger companies. Some 34 percent of the Micro companies granted stock options, compared to only 27 percent of the Top 200 companies.
Full-Value Shares Preferred
We have witnessed a shift over the latter half of the last decade in equity vehicle grant practices away from stock options and toward full-value awards. This shift has occurred across the broader market, regardless of company size or industry.
Changes in accounting rules and an increased focus on director compensation and corporate governance responsibilities have contributed to this trend. In terms of prevalence, the majority of companies in all size categories made full-value equity awards, from 60 percent of the Micro companies to 91 percent of the Top 200 companies.
Larger companies tended to denominate their equity as a fixed-value award, while smaller companies preferred the fixed-share approach. Some 55 percent of the Micro companies provided fixed-share grants, compared to only 24 percent of the Top 200 companies. Conversely, board equity awards were provided as fixed-dollar values at 37 percent of the Micro companies, increasing to 62 percent of the Top 200 companies.
This distinction is important in understanding the year-over-year growth in total equity award values and total direct compensation. The larger companies with fixed-value grant practices reported smaller year-over-year growth in total compensation, and the opposite was true for those companies with fixed-share grant practices (i.e., higher year-over-year growth in total compensation).