Independent director compensation growth slows

Director pay reflects ‘stability, not stagnation’ following post-crisis boost, according to report 

Median compensation for outside board directors in the Fortune 500 increased by 2 percent last year, the lowest rise since 2010, according to new research from Willis Towers Watson.

Directors received median total compensation of $260,170 in 2016, based on Willis Towers Watson’s analysis of pay programs at 300 public companies in the Fortune 500. More than half (57 percent) of the total compensation paid out last year was in equity, while the remaining 43 percent was in cash. The marginal rise represents ‘stability, not stagnation,’ the report authors write.

Board director compensation has grown consistently since the financial crisis, with the median passing the $250,000 mark in 2014. The overall growth since 2010 reflects the increased responsibilities of the board, according to RJ Bannister, leader of Willis Towers Watson’s compensation practice in North America. ‘You probably saw the biggest changes in non-executive pay between 2010 and 2014,’ Bannister tells Corporate Secretary. ‘After the financial crisis, there was a greater focus on defining roles within the board.’

Increase in total compensation for non-executive directors, 2010 to 2016

YearIncrease
2010 6%
2011 5%
2012 3%
2013 6%
2014 4%
2015 3%
2016 2%

Source: Willis Towers Watson

Just under half (48 percent) of the companies reviewed by Willis Towers Watson have separate board chair and CEO positions. Within this group, 69 percent of stand-alone chairs serve in a non-executive capacity. ‘If you look at the Fortune 500 prior to the financial crisis, in the majority of cases the CEO was also the chair,’ Bannister says. ‘Post-financial crisis, you saw a significant number of companies looking at splitting those roles.’

These non-executive chairs received an additional $150,000, taking their median total compensation to $410,000, or 168 percent of the sum the average board member received.

As an alternative to non-executive chairs, one third of companies use a lead director as the highest-ranking independent director – often when the company has a combined CEO and chair, according to Bannister. Lead directors received an additional median payout of $30,000 last year, taking their total compensation to $290,000.


COMPENSATION CAPS ON THE RISE
In addition to refining how different board roles are compensated, many companies are also instituting limits on compensation as a response to a wave of shareholder lawsuits in 2014 and 2015 alleging ‘excessive’ board-approved stock grants.

Fifty-three percent of the companies examined by Willis Towers Watson now have a limit on annual awards for directors, with 38 of those companies establishing the limit this year. A quarter of the companies with limits on annual awards have expanded the scope beyond stock to include cash and/or total compensation.

The terms of the limits are also changing from a fixed number of shares to a fixed financial value. Bannister says this is to prevent large spikes in director pay if the company’s share price rises significantly before it vests. The vast majority of companies surveyed (93 percent) also have stock ownership guidelines and/or retention requirements for board directors. 

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