‘Triple the workload, half the pay,’ is how one director characterized boardroom compensation in 2020, which saw boards of companies in hard-hit industries make partial and full-pay sacrifices. Among companies that made changes to executive pay in the wake of the pandemic, 64 percent extended those cuts to directors, according to a report by The Conference Board.
Ironically, the cuts came at a time when board service was more time-intensive than ever, says Hannah Orowitz, a managing director on Georgeson’s corporate governance advisory team, who noted that more permanent changes are likely when the temporary pandemic-related setback recedes. “Long term, what’s happening more broadly in the dialogue around board composition and board refreshment is going to result in changes to director compensation and, probably, some changes to structure as well as quantum of pay,” she says. Here’s what is potentially on the horizon:
Diversity at a Price
As pressure to onboard diverse candidates continues to mount, boards widening the scope of their searches may find they need to sweeten the pot as well. “That often means you’re looking at younger candidates who are earlier in their careers and perhaps from non-traditional backgrounds like academia or the public sector,” says Orowitz, who says higher pay and offering one-time, sign on equity awards may help bring in new directors. “Pay may be more of a consideration for them.”
Time is Money
There’s also increasing recognition that compensation should reflect the increased responsibility and time commitment board members are taking on. “Directors do an incredible amount of work and allocate an incredible amount of time,” says Lou Taormina, a managing director at FW Cook. “They’re typically doing that more from a self-fulfillment standpoint, not a dollars and sense standpoint, but companies do want to compensate them fairly.”
Movement Away From Meeting Fees
While not uncommon a decade ago, meeting fees continue to be on the wane. In 2019, only 9 percent of S&P 500 companies paid directors for attending meetings, according to Spencer Stuart. Committee fees are still in place at many boards, but less prevalent than in the past. “The responsibilities across committees are really starting to even out, so committee fees may go away entirely to just higher overall board retainers,” says Orowitz. “It probably makes sense for the most part to have an annual retainer sufficient for the time commitment, with the understanding that in cases like the current situation, crises may require additional meetings.”
Avoidance of Options
Ideally, most director pay programs should reflect a balance between cash and equity, potentially tilting toward equity, so that compensation reflects the distinction between the board’s role and that of executives charged with pursuing performancetargets. “The governance theory underlying compensation is that you want directors to be stewards of the company, so you don’t want them to have a strong risk orientation,” says Alexa Kierzkowski, a managing director at FW Cook. “That’s why you don’t see, other than in early stage companies, much performance-contingent equity.” The cash component of director compensation should be sufficient to cover the tax liability incurred when equity grants vest.
Director pay has yet to come under the level of scrutiny that CEO and executive compensation command. However, investor pressure has come in the form of the ISS’s recent introduction of a non-employee director excessive pay policy that deemed individual total non-employee director compensation in the “top 2 percent of all comparable directors” would be considered excessive.
“For ISS, I think the policy was twofold, to address outliers and just the evolution of them expanding their policies into areas where they haven’t had a real policy before,” explains Kierzkowski. “There is not necessarily the idea of a pervasive problem of rampant director pay—more that there were some outliers.” Still, as with any significant deviation from peer groups, those companies with pay policies that stand out against those of their industry peers should consider addressing any reasons for the discrepancy in disclosure.
Additionally, the Council for Institutional Investors is pressing companies to require that directors hold a meaningful portion of their equity grants until after they retire from a board. While a full 71.7 percent of Russell 3000 companies have yet to adopt retention guidelines, according to the Conference Board, the idea may gain traction over time, says Orowitz. “I think ownership guidelines and retention policies will continue to be something investors focus on and that, therefore, companies should look at carefully going forward.”