Board retainers reach new heights, meeting fee use continues to wane
Despite increased scrutiny of director compensation, median director pay at S&P 500 companies set new benchmarks in 2018 with a median retainer of $100,000, up from $90,000 in 2017, according to a recent Mercer study. However, use of meeting fees continues to decline with just 14% of the S&P 500 paying directors meeting fees in 2018, about half of the frequency in 2014. Given the increased focus on director compensation by shareholders and proxy advisers, companies should be sure to consider market pay levels in setting director pay and provide detailed proxy disclosure of their director pay-setting process.
Median director pay. Median director pay at S&P 500 companies has continued to climb, reaching the following levels in 2018, as noted in the graph below:
- Median board retainer: $100,000 (up from $80,000 in 2014)
- Median board compensation for general service (excluding committee retainer and fees): $270,000 (up from about $240,000 in 2014)
- Total director compensation including service on board committees: $300,000 (up from $265,000 in 2014)
For purposes of this analysis, a typical board member is defined as a member of the board and Audit Committee and Chair of the Compensation Committee.
Board pay simplifies further. S&P 500 companies continue to simplify how they deliver board compensation, with meeting fee use maintaining a steady decline in 2018. Only 14% of the S&P 500 paid meeting fees in 2018 (down from 26% in 2014). A vast majority of firms (84%) now compensate directors with a combination of a retainer and an annual equity grant, up from 72% in 2014.
The elimination of meeting fees points to companies’ desires to simplify their director pay programs and increase transparency in board compensation levels. It also represents the growing expectations and complexities that directors face when joining aboard. Today’s corporate board member must react swiftly and effectively to cyber-attacks, address sexual harassment allegations, and respond to stakeholders’ concerns about sustainability and corporate responsibility — along with other more traditional challenges like succession planning, executive pay, and financial oversight. These complex matters require far more than simply attending periodic meetings. The evolution in director pay programs acknowledges that many of the director's responsibilities today are performed outside of board and committee meetings. The challenges of modern corporate governance require flexibility with respect to time commitments and frequent engagement with a variety of stakeholders.
Pay for committee meetings/membership declines in prevalence. Trends in pay for serving on board committees mirror those observed in pay for general board service, shifting away from meeting fees. In 2018, roughly 16% of S&P 500 companies paid meeting fees to audit, compensation and governance committee members (down from about 30% in 2014). This coincided with a slight uptick in the use of retainers for committee service over the same period.
However, a more substantial change in committee compensation is the number of companies that paid no additional compensation for service on a board committee. In 2018, 41% of audit, 52% of compensation, and 53% of governance committees did not provide additional compensation to committee members for their committee service. These prevalence figures represent a roughly 8% increase since 2014. Companies increasingly view service on one or more committees as a requirement for all directors. Consequently, they are structuring board compensation using a holistic, all-inclusive approach, as opposed to paying piecemeal for incremental duties and responsibilities.
Over the past few years, most companies that eliminated additional pay for committee service increased their general board retainer or equity grant to compensate directors for the lost pay, consistent with the increases in board retainers and equity grants since 2014 noted above.
Committee chair premium prevalence and levels remain relatively constant. The prevalence of a premium paid to the chairs of board committees has changed little over the past five years. Roughly 97% of companies paid a premium to the chairs of their standing committees in 2018, compared to about 95% in 2014. The preferred method of paying this premium is overwhelmingly in the form of an additional annual retainer (93-94% depending on the committee type).
In 2018, the median premiums for the three types of committee chairs were as follows:
- Audit committee chair: $20,000, unchanged for the past five years.
- Compensation committee chair: $20,000, catching up with the audit committee chair this year, compared with $15,000 in previous years.
- Governance committee chair: $15,000, consistent with the past few years after increasing in 2015 and 2016.
Companies disclose future pay increases. Companies often disclose planned changes to their director pay programs scheduled to take effect after the annual shareholder meeting. In their most recent proxy statements, 17% of the S&P 500 disclosed a meaningful change to their 2019 director compensation program, such as an increase in pay levels or elimination of meeting fees. For these companies, increases in annual equity grants and board retainers were the most common changes.
Companies pressured to address director pay. Director pay is expected to receive more attention in coming years, in part because proxy adviser Institutional Shareholder Services (ISS) plans to weigh in on compensation levels beginning in 2020. Also, recent shareholder lawsuits accusing directors of awarding themselves excessive compensation have put director pay in the spotlight.
Beginning in 2020, a new ISS policy will trigger adverse voting recommendations for companies with a pattern of “excessive” non-employee director pay without a compelling rationale. The policy is meant to identify pay outliers — defined as the top 2-3% of all comparable directors. Director pay levels tend to be narrowly clustered, so the difference between the 96th and 97th percentiles, for example, may not be large, making it essential for companies to conduct a robust competitive analysis to support the rationale for their director pay levels.
Given the new ISS policy and recent lawsuits, now is a good time for companies to reevaluate their director pay program. With director pay under increasing scrutiny, companies need to ensure their pay programs have been developed using a thoughtful, thorough approach with an awareness of market levels and practices. Stakeholders are expecting enhanced proxy statement disclosure that describes the board’s process for determining its own pay — including peer group comparisons — similar to what companies disclose for executive pay programs.