Results from the 13th annual NACD Director Compensation Report reflect the U.S. economy’s continued quest for solid ground and the host of new regulatory requirements facing companies. This year director pay increased between 6 percent and 8 percent at most companies; however, directors serving the Top 200 companies saw an increase that barely exceeded 1 percent. Data from the report suggest that the low rise in pay among directors in the Top 200 indicates a reluctance to increase compensation while unemployment remains high. Based on the findings, a revised forecast from Pearl Meyer & Partners now predicts low- to mid-single-digit increases in director pay for the foreseeable future, until the economy regains its footing.
“Pay levels didn’t move that much year over year,” says Jannice L. Koors, a managing director of Pearl Meyer & Partners, which provided the data for the NACD study. “The trends we’re seeing are really a continuation of trends that started several years ago.”
The NACD report takes an annual look at pay levels and practices among a broad group of nearly 1,400 companies across 24 industries with revenues from $50 million to more than $10 billion. Highlights from 2011–2012 survey of non-employee director compensation include:
- For the first time, a majority of companies elect directors for a one-year term.
- The percentage of companies with women board members increased with company size, but gender diversity continues to be limited.
- Companies are slow to split the CEO and chairman roles.
- At Top 200 companies, compensation and governance/nominating committees took hits in the prevalence of committee member compensation and median committee compensation.
The practice of holding annual elections of directors has been on the rise in recent years, and this year was no different. Annual elections are now typical among the companies analyzed, and most prevalent among the Top 200, at 83 percent. The move to declassify boards is in response to pressure from governance groups and activist shareholders, PM&P suggests in the report. Proxy advisory groups are also playing a role, issuing director election recommendations to limit the number of boards on which a director may serve.
Director tenure is up across all revenue categories, to almost eight years, while the average mandatory retirement age, where it exists, remains at 72.
Board size and composition practices often correlate with company size. The median board size increased, ranging from eight directors in the Micro and Small-company categories, to 12 directors in the Top 200.
The percentage of companies that have women members on their boards also increases with company size, but gender diversity continues to be limited. While a majority of companies in all but the Micro category have at least one woman director, and the majority of the Large and Top 200 companies have at least two, few companies have more than two women serving on their boards. “There is a long way to go for gender diversity on boards,” Koors says.
Board Pay Mix
Public boards, no matter the size, generally rely on the same mix of cash and equity components: a combination of a board cash retainer, board meeting fees, committee pay, full-value stock and stock options. Increases this year were more evenly distributed between cash retainers and board equity awards. For companies outside of the Top 200, increases to board cash retainers were in the range of 7 percent to 19 percent. Increases to board equity grant values were more modest, ranging from 5 percent to 15 percent, excluding Small companies. The result is a 2 percent to 8 percent increase in compensation for board service, excluding committee compensation.
The board cash retainer as a portion of total director compensation is generally constant across all size categories, ranging from 31 percent to 34 percent of total director compensation, or TDC. Board meeting fees ranged between 2 percent to 11 percent, committee pay from 7 percent to 12 percent, and equity awards from 43 percent to 57 percent. Larger companies deliver the majority of TDC through equity compensation, with board meeting fees and committee pay being the smallest components of TDC—2 percent and 7 percent, respectively— at Top 200 companies.
The annual cash retainer continues to be the most common element of board compensation. The percentage of companies providing an annual cash retainer increases with company size, from 93 percent of Micro companies up to 98 percent of Top 200 companies. In contrast, the prevalence of board meeting fees continues to decline across all size categories, with only 61 percent of Micro and Small companies and 31 percent of Top 200 companies paying board meeting fees. The drop is likely caused by confusion over what constitutes a formal meeting for compensation purposes, as more remote communication is used, PM&P’s research suggests. Similar to last year, full-value shares are favored over stock options, both in terms of relative value and prevalence.
Also similar to past years, the majority of companies compensate directors for their service on different committees. The percentage of companies paying an additional retainer to committee chairs and committee members increased across all categories, while the prevalence of committee meeting fees generally decreased.
Committee compensation rose for three of the five size categories, mostly due to increases in committee chair pay. Over the past several years, more board work has been conducted at the committee level in order to better manage workflow and maximize efficiency. Committee chairs bear the burden of this additional work, and that is reflected in the increases in committee chair compensation.
This year the prevalence of meeting fees for both board and committee service continues to decline in all size categories, with the prevalence of board meeting fees down by 2 percent to 5 percent. Committee meeting fee prevalence took a harder hit, with decreases ranging from 1 percent to 8 percent across all categories; this has led to minimal increases, and in some cases decreases, in both board and committee meeting fees. The trend is expected to continue as more companies shift pay from meeting fees to retainers and equity awards.
Total board compensation expenses— including retainers, fees and equity compensation for board and committee service for all non-employee directors— takes into account the design of the director compensation program and the size of the board; that is, a board with more members will have a higher cumulative cost of board compensation. The median cumulative cost of board compensation at Micro companies was $607,604, or 0.25 percent of company revenues.
At Top 200 companies, the cumulative cost of board compensation was almost $2.4 million, but accounted for only 0.01 percent of revenues. Total director compensation on a per-meeting basis rose with company size, ranging from $6,098 per meeting at Micro companies to $12,425 at Top 200 companies.
Cash Versus Equity
The majority of companies in four out of five size categories deliver at least 50 percent of total pay in equity, with Micro companies as the outlier. But Micro companies did make some progress, with 46 percent providing at least half of total compensation in equity, up from 40 percent last year.
Full-Value Share Grants Favored
Companies are continuing to shift their equity vehicle grant practices away from stock options and toward full-value equity, based on the idea that full-value shares as a compensation vehicle for directors create stronger alignment between director and shareholder interests. Data from the report suggest that trend will continue; however, stock options will not cease to exist as a form of compensation, particularly for smaller companies or in industries that rely heavily on the granting of stock options to recruit employees and directors alike.
Granting full-value awards is the majority practice among all companies, with prevalence ranging from 64 percent of companies in the Micro category to 94 percent of the Top 200. Year-over-year increases in the prevalence of full-value awards were in the low- to mid-single-digits, ranging from a 1 percent increase for Small companies to a 6 percent increase at Medium companies.
Equity Grant Practice: Fixed Values Versus Fixed Shares
Most companies (excluding those in the Micro category) choose to denominate equity as a fixed-value award, and this approach continues to rise, particularly among Medium and Large companies— a 9 percent increase over last year. More than half of Micro companies denominate their equity as a fixed-share award.
Committee Service and Compensation
The work of the board is increasingly being conducted at the committee level, as directors seek to “divide and conquer” the volume of issues they face. Virtually all companies in this survey maintain audit and compensation committees. Due to a heightened focus on corporate governance, director qualifications and elections, the prevalence of governance/nomination committees has risen over the past several years and now exceeds 90 percent.
Firms often maintain several other committees, with, for example, executive committees ranging from 24 percent to 47 percent and finance committees between 10 percent and 50 percent. However, when it comes to committees devoted to individual topics such as environmental/ health/safety or investment and technology, prevalence drops into the single digits.
Pay for committee service remains high, particularly for service as a chair of standing board committees. However, compensation for serving as a member of standing board committees continues to fall.
Generally, at least 87 percent of all companies pay some form of compensation to the chairs of these board committees, with committee chair compensation for the governance/nominating committee at Micro companies the lone exception, at 78 percent. Incremental committee chair pay tends to be in the form of a retainer rather than meeting fees.
As expected, the prevalence of compensation for members of standing board committees is lower than for chairs of standing board committees, and compensation for members is more likely to come through meeting fees than a retainer. Fewer than 40 percent of all companies provide a cash retainer for serving as a member of a standing board committee, but the prevalence of meeting fees is almost 60 percent for several size categories.
Companies continue to differentiate pay for service on the different standing board committees. Between 79 percent and 88 percent of companies across all revenue categories tailor some aspect of committee compensation to their level of work and responsibilities. Most often this differentiation is seen in the cash retainer paid to committee chairs.
The chairs of audit committees continue to receive the highest compensation for committee service, ranging from 45 percent to 85 percent more than that of compensation chairs. Interestingly, the median compensation for both the chair of the governance/nominating committee and the compensation committee is now equal at Top 200 companies.
Committee member pay follows a similar pattern, with a few exceptions. Audit committee members received a premium over compensation committee members, ranging from 33 percent at Large companies to 65 percent at Medium companies. Excluding Top 200 companies, compensation committee members received premium compensation over members of the governance/nominating committee, ranging from 33 percent at Medium companies to 80 percent at Micro companies.
At Top 200 companies, the prevalence of compensation committee member pay has declined to almost 50 percent of companies, and dropped below 50 percent for the governance/nominating committee. This has driven median compensation for compensation committee members down to $2,500, and down to zero for governance/nominating committee members. “While the year-over-year change in values is not meaningful, the shift in prevalence away from committee member compensation is a significant trend,” Koors notes.
Share Ownership Guidelines
Greater attention to corporate governance has led to an increase in the prevalence of companies establishing share ownership guidelines, ranging from 31 percent at Micro companies to 89 percent at Top 200 companies. Companies tend to prefer to express ownership guidelines as a multiple of the annual retainer by at least a 2:1 ratio; the median ownership requirement ranged from three times the annual retainer for Micro companies to five times the annual retainer for Large and Top 200 companies.
Though less commonly used, retention ratios offer an effective way to promote stock ownership, often in conjunction with share ownership guidelines. Retention ratios require directors to retain a majority of their stock awards, ranging from 50 percent to 100 percent, which typically refers to the number of shares received after satisfying tax obligations.
Copies of the complete 2011–2012 NACD Director Compensation Report are available for purchase at NACDonline.org.