January 10, 2017
Over the last five years, director pay caught the attention of investors in light of various legal and regulatory issues. While compensation has risen over that time period as a result of expanded director responsibilities in the boardroom, shareholders are engaging more with their boards due to implications following Dodd-Frank and Sarbanes Oxley. Equilar recently hosted a webinar with Tom Ramagnano, Partner at Meridian Compensation Partners, and Megan Arthur Schilling, Associate at Cooley to address the nuances of director pay, including trends in plan design and philosophy and implications from recent litigation. The panel also discussed results findings from the Equilar report, ref=""Director Pay Trends 2016.
Equilar had the opportunity to speak with Ira Millstein, a renowned corporate lawyer and founding chair of his namesake Center for Global Markets and Corporate Ownership at Columbia Law School. His new book, The Activist Director, provides pragmatic suggestions for directors on building boards that can, and will, put the welfare of the corporation first.
Director Pay Trends
Director pay continues to increase, and the median retainer for S&P 500 directors reached $240,000 in fiscal year 2015—17.1% growth since 2011. With this increase, some question the degree to which director pay is correlated to company performance.
“Although there is a similar trend line between performance and the S&P 500, I think the increase in pay is very likely coincidental,” suggested Ramagnano. “Unlike pay plans for executives, the compensation plan for non-executive directors is specifically designed not to be performance-based, because directors have a fiduciary duty to shareholders to drive long-term growth of the company, not to drive results of the operational duties, which performance-based plans focus on.”
Legal Impacts on Director Pay
Recent litigation has placed the spotlight on outside directors, as claims have surfaced that pay for these individuals is excessive. As a result, many companies are now including a director-specific limitation in their shareholder approved stock plans that places a cap on annual equity awards to directors. “The way to proactively deflect this litigation risk is for the stockholders to approve a meaningful limitation on director compensation,” explained Schilling. “This will raise the bar and make it very difficult for the plaintiff to move forward with the litigation.”
With the number of legal issues of this nature on the rise, subsequently, the amount of director pay limits increased from 33% in 2015 to 46% in 2016, according to Cooley data.
Pay for Board Leadership Positions
In 2015, non-employee, non-executive chairs received $150,000 more than the median board member, while lead directors were awarded approximately $35,000 more for their duties. A key trend to note is the increasing occurrence of splitting the CEO and chair position. Currently, 50.3% of S&P 500 companies have a CEO-chair, down from 56.2% in 2011—of those with CEO-chairs, now 83.7% have a lead director as well, up from 64.3%.
“It’s been an evolution of the roles that has led to the disparity of pay in the roles,” explained Ramagnano. “The non-executive chair is viewed as the functioning leader of the board having responsibilities of setting board agenda, partnering with the CEO on strategic matters and communicating with shareholders… given the magnitude of these responsibilities, the pay for this role is much higher.”
Overall, there is now a greater focus on the duties of the directors, as opposed to what their titles are, when setting pay.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Communications at email@example.com.