2014 Director Compensation Report

The following post comes to us from Eva Gencheva, executive compensation consultant at Frederic W. Cook & Co., Inc., and is based on the summary of a FW Cook report; the complete report is available here.

Frederic W. Cook & Co. Inc.’s 2014 Director Compensation Report indicates that non-employee director compensation increased modestly since last year, with increases ranging from 4% to 7%. Although no new design trends were observed, the streamlining of director compensation continues through (1) replacing meeting fees with higher cash retainers implying that director attendance is a prerequisite of board service, (2) denominating equity grants as a dollar value rather than as a number of shares to mitigate year-over-year valuation changes, and (3) shifting from stock options to full-value shares to strengthen the alignment of directors’ and shareholders’ interests.

Our study analyzes non-employee director compensation programs of 300 publicly traded U.S. companies based on proxy statements filed from April 2013 through April 2014. Prospective program changes are reflected in the analysis, if disclosed. Companies are classified in five industry sectors: financial services, industrial, retail, technology, and energy, and three size segments, based on market capitalization: small-cap (less than $1B), mid-cap ($1B-$5B) and large-cap (larger than $5B). All statistics quoted in this summary refer to median (50th percentile) practice unless indicated otherwise.

Key findings of our 2014 Director Compensation Report are as follows:

  • Compensation levels largely correlate to company size, with industry differentials less apparent
  • Compensation increased most rapidly among small-cap companies (7%) and large-cap companies (6%), followed by mid-caps (3%), resulting in compensation of $133,871, $189,500 and $250,000 at small-, mid- and large-cap companies, respectively
  • The mix between cash and stock is consistent across size segments as all provide at least 50% of total compensation in equity, on average
  • Not surprisingly, technology companies place a greater emphasis on equity (about 67% of total compensation) as stock is often regarded as “liquid” as cash, while financial services companies pay the highest portion of total compensation in cash consistent with the regulatory view of risk-taking for that industry segment (51% of total compensation)
  • Board cash retainers vary somewhat with company size, ranging from $50,000 at small-cap companies to $75,000 at large caps
  • Meeting fees continue to decline in prevalence, with board meeting fees used by only 24% of large-cap companies compared to 45% at small caps. Where still used, board meeting fees increased modestly but vary little by company size ranging from $1,800 at small-cap companies to $2,000 at large-cap companies
  • Equity compensation levels are lowest in financial services companies ($77,550) and highest at technology companies ($130,550), where stock options are more likely to be used in addition to full-value stock awards. Similar to cash retainers, company size seems to be the primary determinant of equity value, with median stock awards at large-cap companies ($150,000) twice the amount of those at small-caps ($75,000)
  • Equity compensation across all sizes and industries is predominantly delivered in full-value share awards (i.e., outright stock grants, deferred stock units, restricted stock, restricted stock units), typically denominated in terms of dollar value rather than number of shares
  • Stock options have largely disappeared across most sectors (15% or less), but are still used by a third of technology companies
  • Committee service is compensated through meeting fees at 38% of companies and through committee member retainers by 30%-38% of companies. Committee fees, when provided, tend to be about $1,500, with minimal variation based on industry or size
  • Audit committee chairs and members continue to receive the highest level of compensation for committee service, relative to other standing committees
  • Compensation for committee chairs also varies by size. Large- and mid-cap companies provide median committee chair retainers ranging from $10,000 to $25,000, followed by small-cap companies at $9,500 to $15,000
  • Non-executive chair retainers correlate with company size as large-cap companies pay a median retainer of $164,400, which is more than three times the median retainer of $50,000 at small-cap companies
  • Retainers for lead directors have been stable and continue to be $20,000 to $25,000 across the various industry and size segments analyzed
  • Stock ownership guidelines have become universal at large-cap companies and continue to grow in prevalence among smaller companies. As external governance pressure has increased, ownership guidelines are trending toward a multiple of five times the cash board retainer as is a 100% mandatory hold until retirement or termination of board service
  • For similar reasons, anti-pledging policies have also increased significantly in prevalence (from 24% last year to 39% of companies in this year’s study)

In conclusion, this year’s study continues to exhibit the same trend of slow but steady increases in average total director compensation. Director compensation programs continue to be streamlined and size tends to drives compensation amounts more than industry.

The complete report is available here.

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