50 Ways to Pay Your Board of Directors

Fred WhittleseyPay and Performance: The Compensation Blog0 Comments

I think Paul Simon had it relatively easy when he composed Fifty Ways to Leave Your Lover as he only identified five of them in response to the woman’s question. My recent research into compensation practices for members of public company boards of directors finds there are 50 ways to pay your directors (so that they don’t leave and they love you). Yes, 50 different forms of pay are currently being offered to directors of public companies (excluding benefits coverage, deferred compensation plans, and various perks). I may be off by one or two but certainly not off by 45.Director pay levels have risen by triple digit percentages over the past few years – due in large part to the increased undesirability of public board service in the Sarbanes-Oxley environment – and at the same time has become extremely complex as various roles have emerged and increased in market value. Additional pay is provided for independent board chairs, lead independent directors, committee chairs (with premiums paid for audit and compensation committees), committee service, and special committee work (with “special” often meaning “the company is being investigated and you don’t seem to be implicated so you’re on the committee – congratulations”). The combination of these roles multiplied by the use of cash retainers, cash meeting fees, initial option grants, annual option grants, initial share grants, annual share grants, and various hybrid forms of these quickly brings us to 50 forms of pay being used.

Most analyses of director pay, however, are rooted in the good ol’ days when reporting the basic elements told the story – annual retainer, meeting fee, options. Now it is necessary to capture all of the elements of pay, value them, calculate actual pay delivered based on board activity levels, and then compare across companies.

Given that board pay structures range from high-risk entrepreneurial (options only) to low-risk not very entrepreneurial at all (cash and shares) it is necessary to understand how much pay will be delivered under various performance scenarios. The Coca-Cola Company’s recent announcement about director pay, the highly criticized attempt at pay-for-performance it is, reintroduced the notion that director pay like executive pay should have a direct link to company performance. Simplistic analyses of retainers, meeting fees, and option grants no longer provide accurate and meaningful data on director pay. A comprehensive gathering of all forms of data viewed through a performance model is required to understand the whole story.

In the software sector, a sample of 35 companies reveals that no two companies pay the same combination of 50 different cash, share, and option elements for the same reasons. That’s right – each company is different from all the others and it takes 50 columns on a spreadsheet to figure that out. (My statistician colleagues would argue that if this holds true across a larger sample then there are probably hundreds of ways to pay directors but that would blow the Paul Simon analogy.) Then it takes a few more spreadsheets to figure out who gets paid for performance and who doesn’t. As a compensation consultant that’s what I get paid for, so I’m not complaining. It just makes for a long answer when someone asks “what are other companies doing about director pay?”

Understanding pay levels and practices for public company directors has become just as complicated as being one. Maybe that’s appropriate. It requires some sophisticated data gathering and modeling, however, to understand how much they’re being paid and whether that pay is based on performance or merely based on membership and not even attendance.

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