Board of Director Pay Trends and Corporate Governance Outlook – More than meets the eye!

March 14, 2018 Sharon Pistilli

Some years, it seems like analyzing board of director pay is like watching grass grow. Trends in this area tend to move slowly over time. However, keeping a close eye on the competitiveness of outside director pay is an important element of good corporate governance practice. And depending on the industry or size of your organization, trends in pay practices may be moving faster than you think.

Starting in the 2019 proxy season, board of director pay will be monitored by Institutional Shareholder Services (ISS), which makes a thorough outside director pay review even more critical. Aon’s Compensation and Governance Professional (CG Pro) benchmarking and planning suite has the data, tools, and expert advice to make the competitive analysis of outside director pay easy for you.

Trends in Board of Director Pay

For the past two years, we’ve compiled Aon’s CG Pro Annual Report on Board of Directors, which covers compensation programs and pay practices for board and committee service for the S&P 1500. For committee pay, we’ve focused on the three committees that are most prevalent: audit, compensation, and nominating & governance.

What are the main findings of this year’s report?

  • Total outside director compensation (inclusive of board and committee compensation, plus equity) rose a modest +2% to $195,000
  • Board retainer pay saw a larger uptick, +8%, to $70,000
  • Board equity awards, were more or less unchanged (+1%) at $120,000
  • Meeting fees at both at board and committee levels continued to shrink as boards continued to simplify design

The remainder of this blog highlights the differences in outside director pay by market capitalization and industry, since director pay can vary significantly.


Overall Board Compensation

  • Overall board compensation is up 2% at median, from $192,000 in 2016 to $195,000 in 2017.
  • Pay in the utilities sector increased 4% (from $199,500 to $207,500).
  • Increases in cash retainer and equity grants caused compensation to advance 4% in the finance industry (from $140,000 to $145,000), and 8% in the retail sector (from $185,000 to $200,000), respectively.

Some of these gains were driven by growth in company size in these industries and the resultant increase in pay with size. More companies within the retail and financial services industries,were classified as mid-cap and large-cap in proxy year 2017, and fewer were classified as small-cap, than 2016.

 Board Member Compensation (Picture 1).png

Source: Aon’s 2016 and 2017 CG Pro Annual Report on Board of Directors 

The vast majority of companies compensate their outside directors using cash as at least one component (98%). Seventy-two percent pay a cash retainer only, 26% pay both a cash retainer and meeting fee, and a very small minority compensate directors solely with meeting fees (2%).


Cash Retainer

The median cash retainer rose 8% from $65,000 in 2016 to $70,000 in 2017. The year-over-year increase varies by industry:

  • Manufacturing and energy were flat
  • Median cash retainers in the financial services sector rose 15% from $60,000 in 2016 to $68,750 in 2017.
  • Median cash retainer for service, retail, and utilities all increased 8% to $65,000, $70,000, and $85,000, respectively.

 Year Over Year Change in Median Cash Retain (Picture 2).png

Source: Aon’s 2016 and 2017 CG Pro Annual Report on Board of Directors 


Board Meeting Fees

Overall, the practice of offering board meeting fees declined, falling from 30% to 27% and continuing a long-running trend. For those companies still pay board meeting fees, the median meeting fee varies from $1,500 to $2,000.

Total board meeting fees, remained flat with a median of $12,000. However, some industries saw median total board meeting fees rise including: utilities (+11%), energy (+15%), retail (+20%), and finance (+25%). The increase in retail board meeting fees was due in part to the increase in an number of board meetings.

 Year Over Year Total Board Member Meeting Fees (Picture 3).png

Source: Aon’s 2016 and 2017 CG Pro Annual Report on Board of Directors 


Committee Meeting Fees/Retainers

Most companies (>86%) provide a retainer to the chair of the major board committees (audit, compensation, nominating and governance). The retainer is highest for the audit committee ($20,000) and lower for the compensation ($15,000) and nominating ($12,000) committees.

Retainers are less common for committee members (47% audit, 40% compensation, 37% nominating) and the retainers are also lower ($10,000, $8,000, and $6,000, respectively).

Roughly one-quarter of companies offer meeting fees to these committees, at an average meeting fee of $1,500.


Equity Awards

Almost all of the S&P 1500 provide annual equity awards (99%).

  • Overall, median equity grants were fairly flat year over year (+1%). Small-cap company grants increased by 7% (from $85,000 in 2016 to $85,777 in 2017), mid-cap grants were relatively flat (+2%, from $105,000 in 2016 to $107,500 in 2017), and large-cap grants increased by 4% (from $140,000 in 2016 to $145,000 in 2017).
  • The largest increases in equity grants were in the finance industry (+36%, from $70,104 in 2016 to $95,000 in 2017) and retail (+14%, from $110,000 in 2016 to $125,000 in 2017).
  • Among those finance- and retail-sector companies that are in the S&P 1500, we noted a decrease in companies classified as small-cap, and an increase in companies classified as large-cap and mid-cap.
  • Eighteen percent of companies provide one-time initial grants, but this practice has decreased in prevalence, down from 22% in 2016. Special grants are extremely rare (1%).

 Year Over Year Total Board Equity (Picture 4).png

Board of Director Pay and ISS: What Should We Expect?

We asked Aon’s Corporate Governance Leader, Laura Wanlass to offer some insights on what we expect to see in the corporate governance landscape.

What are ISS’s plans for analyzing board of director pay?

There will be no immediate action for the 2018 proxy season, but during the 2019 proxy season, board of director pay will come under scrutiny in terms of excessive pay being flagged—in a manner that is similar to the way ISS reviews compensation policies and practices for name executive officersCommittee members deemed responsible for setting “excessive” director pay levels can expect ISS negative vote recommendations.

What are the steps companies need to take to determine if they are competitive?

While it’s difficult to predict exactly what ISS will use for a peer group, as long as you take a logical approach to developing an industry- and size-appropriate group, the results should be reasonably similar to ISS findings. While Board of Director Pay does vary somewhat from industry to industry or based on the size of the organization, the variability is much less than in executive pay, so a slight variation in peer group should not have a material impact on the results.

What are the common and less well-known pitfalls to avoid?

Beyond ISS, plaintiff’s law firms are also scrutinizing board of director pay quantum and practices. As such, disclosed pay levels or designs that make your practices outliers pose some risks. For example, similar to NEO pay, disclosure of a formal policy of benchmarking upper-quartile pay components and/or use of aspirational peers can be red flags for such external groups.

Are we expecting any shareholder activism in this space?

Plaintiff’s law firms are aggressively going after companies for excessive pay levels due to self-dealing. Unfortunately, given recent case law in this area and the notion that there is a natural conflict of interest with directors setting their own pay levels, directors are not always able to use the protection of the business judgment rule to avoid costly litigation around board of director pay levels. As such, it is important that companies follow sound annual board of director pay-setting processes in order to avoid potential lawsuits—or possibly to pass a review under the legal “entire fairness” standard. Good governance processes in this area include (but are not limited to), annual benchmarking against relevant peers, setting appropriate annual equity (and possibly total compensation) limits, and ensuring adequate documentation and disclosure of such processes and decisions.

Are there any particular industries that have practices that we expect to be problematic?

No; companies of all sizes and industries have been targets of board of director pay lawsuits. Companies without annual limits (on cash or equity) and a heavy use of equity compensation are common targets.

To learn more about the corporate governance and Board of Director compensation services and products Aon offers, please contact us


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