2016 Director Compensation Report

Eric Graves and Thomas Kohn are consultants at FW Cook. This post is based on a FW Cook publication by Mr. Graves, Mr. Kohn, and Eric Winikoff.

FW Cook’s 2016 Director Compensation Report studies non-employee director compensation at 300 companies of various sizes and industries to analyze market practices in pay levels and program structure.

In terms of pay levels, total compensation increased by 1.3% at the median of the total sample versus last year’s study, which reflects an apparent stabilization of director pay among large- and mid-cap companies in particular. Large-cap companies in our study pay directors $260,000 at the median and $300,000 at the 75th percentile, unchanged from last year. The mid-cap median of $200,000 reflects only a 1.1% increase from last year, while the small-cap median of roughly $145,000 reflects a larger increase of 6.0%. Technology continues to be the highest-paying sector in our study, and Financial Services the lowest, consistent with recent years.

In terms of program structure, design trends observed in recent years continue. In line with the trend toward simplification, meeting fees continue to be eliminated in director pay programs but are still used by a minority of companies. This is often, but not always, accompanied by the introduction of retainers for committee member service, indicating that companies have different perspectives on the need to differentiate compensation based on committee service. Companies continue to shift away from fixed-share equity award guidelines to mitigate volatility in reported director pay and P&L expense. The small minority of companies still providing stock options continues to shrink, as the high risk-and-reward profile of stock options is viewed as incongruous with the director role, whereas full-value stock provides more consistent pay and direct shareholder alignment.

In terms of governance, director stock ownership guidelines continue to increase in prevalence, particularly among mid- and small-cap companies who are following the trend initially embraced by large companies. Mandatory stock deferral/retention requirements are modestly increasing in prevalence, primarily in the form of equity awards that, by their terms, do not settle until after retirement from the board. These awards are utilized by 15% of companies granting equity annually versus 10% last year; prevalence is highest among large-cap companies.

In response to recent shareholder lawsuits regarding the reasonableness of director pay, an increasing number of companies have been adding annual limits on director compensation to shareholder-approved equity plans to mitigate the risk of litigation. Roughly one-third of companies in this study have such limits, and we expect this percentage to grow, as many companies are waiting to implement this feature until they bring the applicable plan to shareholders for normal-course re-approval. To enhance protection, these limits are increasingly covering total pay rather than just equity; among the sample, 30% of limits proposed in 2016 cover total pay, versus just 4% of limits proposed prior to 2016. Among the companies in this study, limits on total pay typically reflect a multiple of two to three times annual total pay. Despite this emerging trend, most companies utilizing limits cover only equity compensation per director.

The following chart summarizes total non-employee director pay levels and market capitalizations of the 300 companies in our study (100 companies in each size grouping):

Small-Cap  Mid-Cap Large-Cap
Median Values (Less than $1B) ($1B – $5B) (Greater than $5B)
Total Compensation—2016 Study $144,625 $200,000 $260,000
Total Compensation—2015 Study $136,401 $197,750 $259,583
Year-Over-Year Compensation Change 6.0% 1.1% 0.2%
Market Capitalization ($M)—2016 Study $474 $2,464 $15,815
Market Capitalization ($M)—2015 Study $457 $2,567 $17,517
Year-Over-Year Market Cap. Change 3.8% -4.0% -9.7%

Additional key findings are summarized below:

Cash vs. Equity
  • Companies in all size segments continue to provide more than half of total pay in equity, on average, with equity weighting generally increasing with company size
  • The average mix across the entire sample is 43% cash and 57% equity
  • Technology companies continue to have the most equity-heavy mix, and Financial Services the least
Cash Compensation for Board Service
  • Roughly three-quarters of the sample use retainers only (no board meeting fees)
  • The median value of board retainers is $85,000 at large-cap companies, $65,000 at mid-cap companies, and $50,000 at small-cap companies, each of which reflects a $5,000 increase from last year
Equity Compensation for Board Service
  • At least 80% of companies in each size group grant full-value stock awards exclusively (i.e., no stock options)
  • The vast majority of equity awards continue to be denominated as a dollar value rather than a number of shares
  •  The Technology group, which historically had the highest prevalence of stock options, made a material shift toward full-value stock awards only (from 78% to 85% of companies); the Industrials group now has the highest prevalence of stock options (18%)
Committee Compensation
  • Nearly two-thirds of companies provide additional compensation to committee members, with committee member retainers remaining the more prevalent means of accomplishing this, as opposed to committee meeting fees
  • The magnitude of committee chair/member retainers and committee meeting fees is virtually flat versus last year, although small increases ($1,000-$1,500) in median committee chair retainers occurred among small-cap companies
Non-Executive Board Chairs and Lead Directors
  • Non-executive board chairs are nearly always provided additional compensation for the role, which ranges at the median from nearly $70,000 at small-cap companies to $142,500 at large-cap companies
  • Eighty-four percent of lead directors among the sample receive additional compensation, generally ranging from $20,000-$25,000 at the median across all size and sector groups
Compensation Deferrals
  • Prevalence of cash deferral programs remained steady year-over-year with roughly 60%, 40%,and 20% of large-, mid-, and small-cap companies, respectively, offering such programs
  • Stock deferral programs (including voluntary and mandatory programs) increased in prevalence. Mid-cap companies increased offerings of voluntary stock deferral programs and now offer them more than large-cap companies, although large-cap companies continue to have significantly more mandatory stock deferral requirements and thus overall stock deferral
Annual Limits on Director Compensation
  • Just over 40%, 30%, and 20% of large-, mid-, and small-cap companies, respectively, have annual limits on director compensation in the applicable equity plan
  • Eighty-five percent of companies with limits apply them only to equity compensation per director, despite the emerging practice of applying them to total compensation per director
  • Of companies with equity-only limits, a slight majority define the limit as a dollar value; we expect the proportion of fixed-share limits to decline in use since their reasonableness is subject to stock price movement

The complete publication is available for download here.

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