The Compensation of a Board of Directors

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Public companies usually disclose their board compensation packages.
Public companies usually disclose their board compensation packages. (Image: Comstock/Comstock/Getty Images)

A company's board of directors looks after the interests of shareholders, who elect the directors at annual general meetings. The board appoints the chief executive officer and supervises the company's operations through the audit committee, compensation committee and other committees. Board compensation varies with the complexity and size of the organization. The compensation usually consists of some combination of fees, retainers, reimbursement for expenses, stock options and stock grants.

Significance

Compensation is important because an engaged and experienced board adds value to a company. Jeremy Goldstein, partner at law firm Wachtell, Lipton, Rosen & Katz, wrote on the Harvard Law School blog in 2011 that increased regulatory requirements were making it difficult to retain and recruit qualified directors. The competition is intense for prominent and independent candidates. However, the compensation structure should promote collegiality on the board, which means that there should be valid reasons—such as chairing a board committee—for paying one director more than others. The average compensation premium for lead or senior directors is only about 15 percent over regular directors' compensation and about half the chairpersons and senior directors receive no premium compensation at all.

Trends

Total cash compensation, which includes per meeting fees and annual retainers, increased on average 2.6 percent for directors and 4.7 percent for the board chair, according to a 2010 board compensation survey by human resources consulting firm Total Compensation Solutions. The meeting fees component fell in 2010 because companies had fewer board meetings. Goldstein suggests that deeper director involvement and the use of virtual communications technologies have led to a decline in per-meeting fees and an increase of retainers in the compensation mix.

Regulations

The 10-year period from 2000 to 2010 saw several changes in corporate governance, including director independence, reporting requirements and the role of board compensation committees and their advisers. The board compensation committee usually sets the compensation structure for senior executives and board directors. The 2010 Frank-Dodd Act required the Securities and Exchange Commission to direct stock market exchanges to adopt certain listing standards with respect to compensation committees. The SEC issued regulatory changes in 2011 to comply with this Act, including requiring each member of the compensation committee to be an independent board member.

Startup Boards

Startups need experienced and well-connected people to guide them through the early years, but they must also conserve cash. Boulder, Colorado-based venture capitalist Brad Feld wrote in 2005 that board compensation for startups should follow certain rules. First, there should not be any cash compensation except for the reimbursement of reasonable expenses, which directors should try to minimize. Second, the stock option grants should be 0.25 to 1 percent of the total employee stock option pool with annual vesting over four years, which means that a director must serve for four years to own all the options. Finally, startups should allow directors to participate in early-round financing on the same terms as venture capital investors. Stock options are contracts that allow employees to buy the underlying share at a specified strike price before an expiration date.

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