Equity-Based Pay Continues To Push Increases In Outside Director Pay

Equity-Based Pay Continues To Push Increases In Outside Director Pay

Equity-Based Pay Continues To Push Increases In Outside Director Pay by Michael Bowie, Tower Watson

Total direct pay for non-employee board members at the largest U.S. companies increased moderately again this year, with overall growth driven primarily by rising stock values, according to Towers Watson’s latest annual analysis of director pay trends among Fortune 500 companies. Annual pay for outside directors increased 4% at the median and has reached the quarter-million-dollar mark for the first time in our study. Two out of five companies made a change to one or more core elements of their director pay program this year, up slightly from the 38% that made modifications last year. While there were some interesting adjustments made to cash pay programs this year, the total cash pay figure remained flat, indicating that the total compensation increase was driven primarily by higher stock values.

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For our latest analysis, Towers Watson’s Executive Compensation Resources group reviewed director pay levels and practices among Fortune 500 companies that filed proxies prior to June 30, 2015, to identify new benchmarks and year-over-year trends. (For last year’s analysis, see “Equity Strikes Back: Larger Stock Values Drive Increases in Outside Director Pay,” Executive Compensation Bulletin, September 24, 2014.)

Key Findings

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  • Total direct compensation for outside directors climbed 4% at the median over the prior year. A typical Fortune 500 director now earns $250,000, up from nearly $240,000 in the prior year, with the average mix of pay remaining constant year over year at 56% in equity and 44% in cash.
  • Median total cash pay remained flat at $100,000 for the second year in a row, although the annual board cash retainer jumped 13% at the median over the prior year. Despite this sizable retainer increase, the continuing decline in the use of cash per-meeting fees for board and committee service contributed to the stability in total cash amounts overall.
  • The annual stock compensation value rose 7% at the median, nearly double the 4% rate observed in the prior year. Full-value stock grants remain the primary method for delivering equity compensation to directors; 96% of Fortune 500 companies now grant one or more types of full-value shares, a slight uptick from 95% last year, while only 9% of companies issue stock option grants as part of their director pay program.
  • Companies continue to impose caps on directors’ potential stock grants. Over a quarter (27%) of companies that adopted or amended stock plans (that include directors as participants) in the 2015 proxy season included an annual award limit specific to non-employee directors. Similar to the 2012 Seinfeld v. Slager case, a Delaware court’s refusal to dismiss a plaintiff’s claim in the 2015 case of Calma v. Templeton has again exposed the vulnerability of the business judgment rule as a reliable defense for directors when setting their own compensation. (See “Delaware Ruling on ‘Excessive’ Director Pay Offers Guidance for Avoiding Future Litigation,” Executive Pay Matters, June 4, 2015 for more on this litigation.)
  • Incremental pay for board leaders remained flat at the median compared with the prior year. Total compensation received by a lead or presiding director relative to that of a typical director remained the same at 11% this year, while the pay growth among all directors has led to a drop in the nonexecutive board chair premium over the typical director from 70% to 64% this year.

Figure 1 provides an overview of the change in median value of all elements of director pay this past year, in addition to the prevalence of these elements.

Figure 2 provides a breakdown of compensation components for fiscal 2014 at the 25th percentile, median, average and 75th percentile, along with prevalence statistics for the various data points of director compensation.

Equity-Based Pay director pay

Cash Compensation

The median annual cash retainer for board service increased significantly in 2014, rising from $80,000 to $90,000. This marks the largest annual increase to the primary cash component of director pay since before the financial crisis of 2009. But, despite this large increase, the median total cash compensation figure remained flat at $100,000, similar to what we found in last year’s review. While these findings may appear contradictory, a closer examination of changes in the use of cash retainers and meeting fees provides an explanation.

Over one-quarter of companies (26%) increased their board retainer this year, up from 21% of companies making a similar adjustment last year. As shown in Figure 3, the number of companies that provide an annual board retainer as the sole form of cash compensation has steadily increased over the last few years. By contrast, over 60% of companies still provide one or more types of variable cash fees (i.e., per-meeting fees or committee member retainers) despite the overall decline in the use of such fees.

Equity-Based Pay director pay

The prevalence of cash per-meeting fees continued to drop this year, falling from 23% to 19% and from 28% to 24% for attendance at board and committee meetings, respectively. However, the prevalence of additional cash retainers for committee service saw only a 2% uptick, from 28% to 30%, in contrast to the prior year in which the prevalence of these retainers jumped from 23% to 28%. The gap between retainer values provided to members of the three primary board committees (audit, compensation and nominating/governance) has also narrowed over the last five years.

Equity-Based Pay director pay

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