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Corporate boards of directors play a critical role in the governance blueprint of their organizations. Boards are responsible for providing direction and oversight to ensure the CEO and other executive team members are leading the organization in a manner that is in the best interest of its shareholders. Traditionally, the board of directors oversees topics like financial strategy, CEO succession planning and executive compensation approval. However, the role of a director has evolved in the modern corporate world.
Today’s board directors are responsible for a slew of topics, including management of key risks—such as those related to cybersecurity and ESG—talent strategy, corporate culture, and much more. According to McKinsey Global Surveys, modern board directors must be well informed on their respective companies and their ecosystems in order to challenge management with critical questions, continually working to enhance their knowledge of the organizations.
The role of a board director is no longer a part-time job, but it now requires a commitment and dedication to its respective organizations. Given the magnitude of the position, board directors are often compensated quite well for their service. As boards are responsible for setting their own pay, they must be diligent in establishing a pay structure that avoids self interest, but one that is also fair considering the duties and commitment involved in the role.
In this study, Equilar examines key trends in director compensation at companies within the Equilar 500—the 500 largest U.S. public companies by revenue—over the last three years. In 2022, the median director retainer reached $285,000, marking a 3.6% increase from the previous year (Figure 1). While the bump in director pay is minor, it does represent a sizable spike compared to 2021 when there was no change in pay from 2020. For the sake of comparison, CEOs within the same set of companies saw a 1.3% decrease in median compensation in 2022.
Director compensation is seldom directly tied to company performance or financial objectives. The equity portion of compensation, constituting over 60% of median director pay packages, is typically granted as time-based and vests only after a specified period of service. In essence, director compensation awards lack immediate liquidity, emphasizing a commitment to the company's long-term perspective rather than serving as a mere incentive for wealth accumulation. The underlying principle is to ensure that directors have a stake in the game, experiencing the consequences when shareholders do.
Company shares, either as stock or restricted stock units, are the most common forms of equity granted, with options being less frequently offered and typically at lower values. In 2022, the median value of equity granted to directors was $175,000—a 6.1% increase from 2020 (Figure 2). The median value of cash increased by 5% to $105,000 in 2022.
Across sectors, healthcare and technology companies saw the largest retainers in 2022 of $315,000 and $312,000, respectively (Figure 3). Meanwhile, the consumer cyclical and consumer defensive sectors both saw the lowest median director retainers at $270,000. Interestingly, energy companies saw no change during the course of the study period, as median director retainers remained at $280,000 from 2020 to 2022 for the sector.
For the most part, Equilar 500 companies hovered around the median annual director retainer. Three companies awarded their directors $500,000 or more annually, while 15 awarded under $200,000. Excessive director pay packages at or above $1 million have not been seen since 2020, when Tesla directors awarded themselves nearly $11 million. The awards were part of a $735 million lawsuit and have since been returned.
As the contemporary board undergoes ongoing transformation, it is anticipated that director compensation will persistently rise. Directors hold a crucial position within organizations, serving as representatives of shareholders in critical discussions and decision-making processes. The challenge for boards lies in striking a delicate balance between fulfilling their responsibility to shareholders and ensuring fair pay for their substantial contributions when formulating their compensation packages.
Senior Director, Content & Communications at Equilar
Amit Batish, Senior Director, Content & Communications at Equilar, authored this post. Courtney Yu, Director of Research, provided data and analysis. Please contact Amit Batish, Senior Director of Content & Communications, at abatish@equilar.com for more information about this article or Equilar research.
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