Companies and organizations employ a board of directors for oversight and guidance purposes. Board members are either executive or nonexecutive. Executive directors help operate the business or organization on a daily basis, while nonexecutive directors -- also called external, independent or outside directors -- monitor and challenge executive directors' and management performance. Board membership requires hard work, and companies reward this hard work with remuneration.
Size and Type Matter
Although outside directors don't participate in daily company operations, they are nevertheless compensated for their time. Large public companies typically pay more to their outside directors; these companies often hire high-profile businesspeople that lend prestige as well as expertise. These outside directors typically earn cash remuneration and company stock as well as reimbursement for personal expenses. They also earn additional money for committee chairmanships and for attending meetings. Small or startup companies typically don't award cash, but they may award a percentage of revenue. Nonprofit organizations often don't remunerate board members at all.
A 2010 Hewitt Associates survey analyzed outside-director compensation at over 700 public companies, and it indicated that 99 percent gave outside directors a retainer for their services; another 83 percent gave "nonretainer equity" in the form of deferred, restricted or outright stock, in addition to stock options. Fifty-six percent paid additional amounts to outside directors for attending board meetings. According to Hewitt, outside director annual retainer compensation averaged over $67,000, and 79 percent of companies that provided a retainer paid this amount entirely in cash.
Outside directors at small, private companies typically earn less than outside directors at large companies. These directors don't earn retainers or other cash awards; instead, the company grants these directors a small ownership stake that vests over time as incentive to maintain the investment. Small companies also typically give their outside directors an opportunity to invest in future growth as well as reimbursing whatever personal expenses they incur while performing board-related duties. The Feld Thoughts website recommends granting outside board members stock options that vest over time; how much in options board members ask for varies widely.
Nonprofit and Not-for-Profit Organizations
While some both nonprofit and not-for-profit organizations may compensate their outside directors, many don't. CharityWatch.org notes that the Brookings Institution and Epsilon reported public confidence in charities is low largely due to charity-related scandals. Should a nonprofit elect to provide a retainer to an outside director, the organization must ensure that the retainer isn't tied to its income. These organizations must report director payments to the Internal Revenue Service; payments that are deemed "excessive" by the IRS will cause the organization significant problems. As a result, many organizations don't remunerate outside directors, they only reimburse expenses.