Director compensation in the U.S. has garnered much less attention than the compensation of executives. Directors are most often elected without challenge, based on the company’s recommendation. They serve, at least in theory, all shareholders and owe their duties to the corporation. In each company, directors are compensated equally regardless of their affiliation, credentials or tenure. This parity has been lauded as a crucial element in promoting board “cohesiveness,” to the benefit of all shareholders.
Recently, however, activist investors have asked shareholders to elect director-candidates who receive a lucrative compensation package from the activist in addition to their compensation arrangement with the company. Incumbent managers and their defenders, such as Wachtell Lipton, have sharply condemned this practice, terming it a “Golden Leash” that subjects the nominated director to the activist’s control. They argue that the payment of incentive compensation by a sponsoring shareholder establishes a two-tiered compensation structure for the board, creates dissension and lack of cohesion in the boardroom, and fosters continuing allegiances between the director and the activist shareholder following the election therefore calling into question the independence of the director. Further, they argue that these arrangements could cause the firm to be too “short-term” oriented. Activists, however, claim that these arrangements help recruit talent that would otherwise not serve on a board for regular director pay, particularly in the case of a contested election and that structuring it as performance-based pay serves a number of useful functions that may not be achieved by fixed compensation.
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