Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 13, 2015
The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Steve Pakela and John Sinkular.
Over the past 15 years, the methods of compensating non-employee directors have changed in tandem with the risk and workload of being a director. The catalyst for change over this time period includes a variety of regulatory requirements, such as Sarbanes-Oxley and Dodd Frank, enhanced proxy disclosure rules and increases in shareholder activism. By way of examples, Audit Committees meet more frequently and must have at least one qualified financial expert, and Compensation Committees have greater workloads. Today’s corporate director needs to dedicate more time to the job, assume greater risk, and meet higher qualification standards. Arguably, these issues, and newer issues such as director tenure limits, have reduced the pool of available individuals who are willing to serve as a director. As with all things impacted by supply and demand, the total compensation provided to directors has increased. Over the past decade, total director remuneration has grown by approximately 5% per year on average.
With the changing role and the increase in total compensation, the design of director compensation programs has changed over time as well. The basic construct of the director compensation arrangement continues to be a mix of cash and equity. However, the means of delivering these two elements has changed rather dramatically over the past decade. Below we review key elements of director compensation programs.
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