Equity awards are a larger portion of total director compensation, with some sources citing approximately 62% in the S&P 500.
Decline of Per-Meeting Fees
Less per-meeting fees with fewer companies offering them. Simplifying compensation structures and paying directors primarily through retainers.
Incorporation of ESG Metrics
Environmental, Social, and Governance (ESG) factors are influencing director compensation, with companies linking compensation to ESG-related performance metrics.
Impact of Inflation and Increased Workload
Inflationary pressures and more complexity of board responsibilities in new topics such as cyber security and AI oversight, are creating increases in director compensation.
Simplification of Compensation Structures
Companies are favoring fixed retainers over variable meeting fees and other benefits, leading to more streamlined compensation models.
Increased Scrutiny and Disclosure
Increased shareholder scrutiny and the need for greater transparency in director compensation are also driving some of these trends.
Prioritization of Board Effectiveness
More board focus is on improving effectiveness, strengthening their ability to balance competing priorities, ensuring directors have the right skills and experience, and fostering strong board-management relationships. Specific focus includes strategy execution, strategy development, AI, cybersecurity, and CEO succession planning.
Boards are now considering compensation based on company culture and board contribution to company performance.
Private vs. Public Companies Trends Differ
Director compensation structures differ for public and privately held companies. Private companies may offer a wider range of compensation models, including cash retainers, per-meeting fees, or a combination of both.
Equity pay is being adapted to type and growth stage of companies. Some private companies and family firms use phantom stock that allow incentives for directors without dilutions. They think it is easier than using real equity and family firms do so as they want to maintain their control.
How to Handle Your Board Compensation Ahead
Here are factors your board can consider:
- Are directors who serve on one committee paid the same amount as those who serve on several committees?
- Flat fees may not be sufficient to compensate directors on committees with crisis situations that require lengthy meetings. Has your board decided in advance how to compensate fairly based on time committed?
- Does your board have deferred compensation, with deferred cash retainers or deferred stock they can cash when the leave board service? More companies are offering a lump sum or affordable installments.
- Have you discussed the fairness of mandatory equity deferrals, which are attractive for older directors and not so for younger directors? Directors need to understand the financial outcomes tied to their board service before they accept the role.
- Consider setting limits on director equity grants? This would reduce exposure to legal cases related to director pay. It will help if your board sets meaningful equity limits you can present for shareholder approval.
Other discussions underway on boards are cited by a
recent study by Diligent, which notes:
