The board of directors is the highest governing authority overseeing the management at any company, typically overseeing the policy and direction of the organization and CEO succession planning. Given this important function, it’s important to understand board pay practices, particularly as board compensation has come under heavier public scrutiny in recent years.
Aon’s third annual Compensation and Governance Pro (CG Pro) Annual Report on Board of Directors covers compensation programs and pay practices for board and committee service for the S&P 1500. Our latest findings based on this report show that after barely moving the needle last year, board of director total compensation rose 6% this year.
Here are some key highlights from this year’s report:
- Total outside director compensation (inclusive of board and committee compensation, plus equity) rose a modest 6% to $224,500
- Board retainer rose a similar 7% to $75,000
- Board equity awards rose 8% to $130,000
- Committee chair retainers were unchanged
- Meeting fees at both at board and committee levels continued to shrink as boards simplify their pay design; only 23% of companies in our study have them (down from 27% last year).
Industry Changes in Board Compensation
Now let’s take a look at the differences in outside director pay by market capitalization and industry, since director pay can vary significantly within these filters.
- Pay in the retail sector increased the most at 11% (from $202,000 to $223,500), while the energy sector saw the most modest increase at 3% (from $246,000 to $254,000)
- Small-cap companies (those with a market capitalization below $1 billion) increased the most at 7% (rising from $159,000 to $170,500)
Figure 1 below provides a snapshot of the change in median total compensation of Board members year over year.
Virtually all companies (98%) use cash as at least one component of board pay and about three-quarters pay a cash retainer only. Another 22% pay both a cash retainer and meeting fee while a very small minority (1%) compensate directors solely with meeting fees.
The median cash retainer for S&P 1500 companies rose 7% this year to $75,000, continuing an annual trend of increasing $5,000 a year for the last three years. However, year-over-year increase varies by industry and size as follows:
- Large-cap companies were unchanged year-over-year; mid-cap companies rose $5,000 to $65,000; and small-cap companies rose modestly to $55,000.
- Energy companies didn’t see a change in cash compensation; financial services and consumer goods saw the smallest bumps at 2% and 3% increases, respectively, while other industries moved up 6% to 7%.
Board Meeting Fees
As we mentioned earlier in this post, the practice of offering board meeting fees has again declined — from 30% of companies offering them in 2016 to 23% in 2018. For those companies still paying board meeting fees, the median meeting fee varies from $1,500 to $2,000, while total board meeting fees remained flat with a median payout of $12,000.
Committee Meeting Fees/Retainers
Most companies provide a retainer to the chair of the major board committees (audit, compensation, and nominating and governance). The retainer is highest for the audit committee ($20,000) and lower for the compensation committee ($15,000) and the nominating and governance committee ($12,500).
Less than half of the boards in our study offer retainers to the committee members (49% audit, 42% compensation, 38% nominating and governance). Of those that do, average retainer fees are lower than the committee chair ($10,000, $9,000, and $6,000, respectively).
Almost all the S&P 1500 companies provide annual equity awards to their outside directors. Median equity awards increased 8% this year, rising from $120,000 to $130,000.
- Small-cap company grants increased the most, rising 12% to $99,250, mid-cap grants rose 6% to $113,750 and large-cap grants rose 7% to $155,000.
- The largest increases in equity grants were among manufacturers, consumer goods companies and utilities (all up 8%), while retailers remained flat year-over-year.
- Seventeen percent of companies provide one-time initial grants, unchanged from last year but down from 22% two years ago.
Trends in board of director pay tend to change slowly over time, but 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.
Board pay will likely face increased scrutiny over the next few years if Institutional Shareholder Services (ISS) moves forward with its planned review of director compensation in 2020. That’s why it’s even more important to stay up to date on the latest trends along with analyses by company size and industry.
Our 2018 Director Scorecard report covers board independence, over boarding, tenure, age, retirement age and gender so you can get a sense of the make-up and demographics of your peers’ board members. Subscribers of Aon’s CG Pro receive a free copy of the Compensation and Governance Pro Annual Report on Board of Directors as well as access to tools such as the Director Scorecard.
To learn more about CG Pro and inquire about the corporate governance and compensation products and services Aon offers, please contact us. You can also purchase a copy of the report here.