2020 Director Compensation Report

Michael Ferrante and Connor Damon are consultants at FW Cook. This post is based on their FW Cook memorandum.

FW Cook’s 2020 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. Year-over-year increases to total compensation, at the median, were modest among large-cap and mid-cap companies compared to small-cap companies, which had a relatively significant increase: the large-cap median increased 1.6% to $290,000, the mid-cap median increased 1.7% to $216,950, and the small-cap median increased 5.1% to $163,500. Changes were relatively stable across industries; we observe that Financial Services, Industrials, and Technology companies had no increases in median total compensation, while Energy and Retail companies had increases of 3% and 2%, respectively.

Director compensation structure remains consistent with prior years, with an average mix of 57% equity and 43% cash across the entire sample. Small-cap companies tend to have the highest cash weighting (average of 47%) and large-cap companies tend to have the lowest (average of 37%). Most companies continue to use fixed-value equity award guidelines, with full-value stock awards remaining the most common form of equity compensation and providing the most consistent means to align director pay with shareholder interests. Equity grants most commonly vest immediately, or cliff-vest after one year.

We continue to observe an increasing number of women on Boards: 94% of companies in the study have at least one woman on the Board (90% last year), 59% of large-cap companies have three or more women on the Board (50% last year) and 25% of both mid-cap and small-cap companies have three or more female members (22% and 13% last year, respectively).

Due to the COVID-19 pandemic, 15% of S&P 500 companies and roughly 13% of Russell 3000 companies reported taking pay actions through the third quarter of 2020, which generally consisted of cash retainer reductions. The median decrease in director compensation was 50% at S&P 500 companies and 40% at Russell 3000 companies. The compensation analysis excludes any temporary reductions to director compensation implemented due to the pandemic.

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):

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.
  • Higher-paying sectors tend to place a greater weighting on equity; Energy and Technology companies have the most equity-heavy mix while Financial Services organizations have the least.
Cash Compensation for Board Service
  • Approximately 80% of the sample uses a retainer-only structure (no board meeting fees), and an additional 6% only awards a meeting fee for abnormally high activity above a pre-set threshold.
  • The median board retainer for large-cap companies increased slightly by $2,500 to $92,500 and remained flat at mid-cap and small-cap companies (at $75,000 and $60,000, respectively).
  • The Energy sector provides the highest median cash retainer for board service ($86,250) and Technology the lowest ($60,000).
Equity Compensation for Board Service
  • Approximately 90% of companies in the sample grant full-value stock awards exclusively (i.e., no stock options). The Technology and Industrials sectors have the highest prevalence of stock options at 18% and 10% prevalence, respectively, granted in isolation or in tandem with full-value stock awards.
  • Approximately 94% of companies denominate equity awards as a dollar value rather than as a fixed number of shares.
  • The Technology sector provides the highest median equity retainer ($161,595) and Financial Services the lowest ($100,000).
Committee Compensation
  • Similar to last year, 63% of companies provide additional compensation to committee members. Fixed retainers remain more prevalent than meeting fees as the means to deliver additional compensation.
  • The prevalence of committee member retainers has been stable year-over-year, while the use of committee meeting fees continues to decrease.
Non-Executive Board Chairs and Lead Directors
  • Non-executive board chairs are almost always provided additional compensation for the role, with the median ranging from $72,500 at small-cap companies to $175,000 at large-cap companies.
  • Lead directors are also almost always provided with additional compensation, ranging from approximately $20,000 to $35,000 at the median across all size and sector groups.
Stock Ownership Guidelines and Retention Requirements
  • Approximately 85% of companies have director ownership guidelines, while stock retention requirements are less common, present at 42% of companies.
  • The most common director ownership guideline is 5x the annual cash retainer with a 5-year timeframe to meet the guideline.
  • Ownership guidelines are typically enforced via a “years-to-achieve” rule (66% prevalence), a retention/holding requirement (11% prevalence), or a combination of the two (23% prevalence).
Annual Limits on Director Compensation Prevalence of annual limits on director compensation remains high, with equity-only limits continuing to be the most common approach, though use of total compensation limits
increased slightly year-over-year (from 39% to 41%).

The complete publication is available here.

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