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.