Public company board members have a unique and sometimes unenviable role in Corporate America. Often working behind the scenes on critically important matters without the glory nor the flash of a CEO position, they bear the weight of decisions made by company executives and carry the torch in front of shareholders, who can often be the toughest critics of such decisions.
As the general public continues to hold up a brighter spotlight on corporate social responsibility and executive compensation, boards of directors are becoming more visible outside of the investment community as well. Add to the fact that many directors serve on multiple boards in addition to their day jobs, all while taking on the responsibility of looking inward to consider how their own board composition and diversity reflects the people whose interests it is their duty to advocate for and protect, public directorships continue to become more demanding.
These demands were all intensifying over the past decade and have only been amplified further since early 2020. The COVID-19 pandemic justifiably receives most of the attention for recent disruption in the corporate environment, but in many cases, it only served as a spark, allowing other events to ignite the flames underneath trends that were already happening: Digital transformation, vulnerability to climate change and cyber attacks, diversity and inclusion, social inequity and injustice, political instability, fair and equitable treatment of all employees, work-life balance, and human capital management. All of these issues weighed heavily on the collective minds of boards of directors in 2020 and 2021, yet none of them are new.
Gone are the days when board members were expected to be pawns in a grand chess match, rubber-stamping executive decisions to create wealth for an upper echelon of stockholders. With the push for independent directorships following Sarbanes-Oxley in 2002, the responsibility to align pay with performance following Dodd-Frank in 2010, and now the pressure to reconcile corporate activity with social responsibility in response to a rise in ESG concerns from a vast majority of corporate investors, the role of the corporate director has evolved considerably.
Board meetings are no longer a hobby to fill the time for post-retirement CEOs. Directorships may be part-time jobs, but they now require overtime commitments. With that, board members are awarded quite handsome annual pay packages for their service. Yet, the balance between fair and outsized director pay continues to be a contested topic, and ultimately, as directors set their own compensation, they must be careful to avoid self-dealing and entering themselves into a conflict of interest.
Retainers Rise Steadily Alongside New Responsibilities
While director compensation numbers pale in comparison to the astronomical figures thrown around on highest-paid executive lists, board members receive solid paychecks for navigating a changing and challenging environment. Their value is centered on understanding the concerns and priorities of corporate stakeholders and ensuring that executives follow through on promises. In 2020, the median director retainer at Equilar 500 companies was $270,000, which increased 1.9% in each of the past two years, up from $260,000 in 2018 and $265,000 in 2019 (Figure 1).
Figure 1: Median Annual Director Retainers (Equilar 500)
Industry Trends Reflect Executive Pay Comparisons
Among industry sectors, communication services and healthcare had the highest median retainer at $300,000, with technology not far behind at $298,000. These trends track alongside compensation comparisons seen among CEOs for Equilar 500 companies, where these three sectors led the way as well. The lowest median retainer of $245,000 was awarded to directors in the consumer cyclical industry, also consistent with trends for executive pay.
Meanwhile, basic materials companies awarded the largest increase in the median retainer to board members from 2018 to 2020, an increase of 12.5% from $240,000 to $270,000. The energy sector was the only industry to see a drop in retainers in any year, falling from $280,000 in 2019 to $275,000 in 2020. The healthcare and real estate sectors remained flat in 2020, while all other industries saw gains (Figure 2).
Figure 2: Median Annual Director Retainers by Sector (Equilar 500)
A Mix of Cash and Equity Provides Balanced Awards
When looking solely at the balance between cash and equity, director pay looks similar to executive compensation. Approximately 35% of board compensation comes in the form of cash and the rest is in equity. However, the philosophy for board compensation is much different than the calculus that goes into CEO pay.
Executive compensation is awarded primarily through variable, at risk and performance-based incentives. Though it amounts to a considerable sum, the median $1.2 million cash salary for Equilar 500 CEOs in 2020 accounted for about 10% of the $12 million in median reported total compensation values. The remaining cash values, coming from annual bonuses, are at risk and based on specific performance measurements. Meanwhile, the equity portion of CEO pay is usually a mix between time-based stock and options,intended to boost retention, and performance-based stock, the latter of which is highly variable based on the executives’ ability to meet targeted goals.
On the other hand, director pay is almost never based directly on company performance or financial goals. The portion of equity that directors do receive, which at the median accounted for roughly 60% of director pay packages when offered, is typically awarded as time-based and vests only after a certain period of service. In addition, directors often have strict ownership guidelines and holding requirements that mandate a certain level of stock outstanding at any given time and do not allow them to sell the shares for a period of time after they vest.
In other words, director compensation awards are not immediately liquid, and the goal of their equity awards is to keep them invested in the long-term outlook of the company rather than to be an incentive solely for wealth creation. The thinking goes that they should have skin in the game, and feel the pain when shareholders do, but that they should not be driven to boost the stock price to pad their personal assets, especially in the short term.
Most companies offered some cash to their board members, with the median value of the cash component coming in at $100,000 annually and the remainder coming in equity. Directors most commonly receive company shares in the form of stock or restricted stock units, with options being less frequently offered, and often at lower values (Figure 3).
Figure 3: Median Annual Director Retainer Pay Component Values (Equilar 500)
Sky-High Retainers Are Rare
Most companies clustered around the median retainer across the Equilar 500, and very few award more than half a million dollars annually. In 2020, 26 companies awarded their directors less than $200,000 for a retainer, and only nine had a median retainer above $400,000. Throughout the study period, just seven different companies have offered their directors more than $500,000, and only three companies offered directors’ compensation above this threshold in 2020.
Just two companies across the entire Equilar 500 offered more than $1 million as a retainer for their directors on an annual basis in any year, and only one company (Tesla) awarded more than $1 million in all three years of the study.
Meanwhile, retainers below $100,000 are also quite rare, with just nine companies awarding less than this amount in 2020. This figure has been consistent throughout the study period, increasing from eight to nine in 2019 and then remaining steady in 2020.
Senior Editor at Equilar
Dan Marcec, Senior Editor at Equilar, authored this post. Courtney Yu, Director of Research, provided data and analysis. Please contact Amit Batish, Director, Content & Communications, at email@example.com for more information or commentary on Equilar research and data analysis.