Study: Compensation for corporate directors is stabilizing

Pay for directors of Fortune 500 boards is stabilizing. (Julia_Sudnitskaya/Getty)

While the high compensation of company directors has been targeted by shareholder activists for years—especially since serving on a board is a part-time position—they have less to complain about this year. Total pay for outside directors at America’s largest corporations increased by a modest 2% in 2016, driven by increases in both cash and stock compensation, according to an analysis released on July 27 by London-based global advisory firm Willis Towers Watson.

Continued slow growth in what boards pay their members suggests that “director compensation is evolutionary, not revolutionary,” Jannice Koors, managing director at compensation consulting firm Pearl Meyer and head of the firm’s Chicago office, told the National Association of Corporate Directors last April. Director pay has, in other words, changed little over time.

The Willis Towers Watson study also found that, of all pay elements in a director’s total package, the annual cash retainer for board service experienced the largest increase within the last year, bounding 6% in 2016. Specifically, the study found, median total direct compensation for directors climbed 2% last year, to $260,200—an increase from nearly $255,800 in 2015.

Total direct compensation includes cash pay and annual or recurring stock awards. According to the analysis, the median value of cash compensation increased 4% in 2016, to $105,000, while the median value of annual stock compensation rose 2% to $150,000. The average mix of pay remained relatively constant at 57% in equity and 43% in cash.

The study identified a number of other key findings. Among them:

  • Caps on director-specific awards. More than half (53%) of companies place a cap on annual stock grants to individual directors—and more than one-quarter (26%) have expanded the pay ceiling to comprise cash and/or total compensation. There has also been a substantial, 10-point shift toward basing limits on a fixed dollar amount (73%), up from 63% last year.

  • Board leadership pay. Nearly three-quarters (73%) of companies now look to lead directors as an alternative to having a chairman serve as the highest-ranking independent board member. Such lead directors received an extra $30,000 in compensation last year, up from $25,000 in 2015.

  • Stock ownership and retention guidelines. Companies continue to maintain stock ownership guidelines and retention requirements for directors. Fully 93% of Fortune 500 companies now have one or both mandates in place. Most guidelines (82%) are based on a multiple of the annual retainer.

“Compensation for outside directors at U.S. public companies appears to have stabilized, at least for now,” said WTW’s North America Leader of Executive Compensation Consulting, R.J. Bannister, in a release. While director pay increased modestly last year, the mix of pay between cash compensation and equity remained constant. In fact, only one-third of companies made any changes to the core elements of their pay programs, with most of those taking a more balance approach to pay adjustments.

The growth in median annual cash compensation was driven primarily by the cash retainer for board service, which jumped 6% in 2016 to $95,000 at the median. Variable cash pay for board and committee meetings remained virtually unchanged from 2015. The median annual stock values increased 2% to $150,000. The vast majority of stock grants (92%) are based on a predetermined value versus 8% of grants that are based on a fixed number of shares.

“Given the ongoing demands and pressures being placed on directors, attracting and retaining qualified candidates to serve remains a challenge for many companies. And despite overall director compensation stabilizing, we expect companies will continue to evaluate the role of fixed and variable pay as well as cash versus stock compensation in their director pay programs and make appropriate adjustments as needed,” said Bannister.

Willis Towers Watson analyzed the compensation for outside directors at 300 publicly owned Fortune 500 companies that filed their fiscal year 2016 proxy statements by June 30. Data for these companies was then compared against an analysis of the same 300 companies for 2015.