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More Organizations Reconsidering Director Pay Programs as Scrutiny Increases

Greater scrutiny of director pay programs is prompting S&P 500 companies to rethink how they compensate board members, according to research from Willis Towers Watson’s Global Executive Compensation Analysis team (GECAT).

 

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Compensation limits are at the forefront of this keen interest, with advisory firms Institutional Shareholder Services and Glass Lewis, as well as shareholders, becoming more vocal and taking direct action. This activism is framed by trends that include avid internal and external interest in board diversity and a shift in board compensation with greater emphasis on equity than on cash pay.

(GECAT) reviewed and compared S&P 500 director pay program results in 2019, using data from 2018.

  • Pay mix settled at 60% equity and 40% cash, a minute change from last year’s 59% and 41%, respectively. Nearly two-thirds (65%) of organizations delivered all or a portion of the annual equity value through restricted stock grants. One-year cliff vesting was favored (64%), followed by immediate vesting (13%).
  • Per-meeting fees for attendance at board and committee meetings continued to drift downward, with board meeting fees declining to 8% from 9% and committee meeting fees to 11% from 14%. In contrast, the use of committee member retainers continued to rise, with cash member retainers edging up to 36% from 33%. Even so, median values for these pay elements remained steady.
  • The annual board cash retainer increased 5% at the median, from $95,000 to $100,000. The retainer changes combined with the aforementioned meeting fee and member retainer adjustments kept median annual cash compensation static at $105,000. Annual stock compensation went up by 4% (from $160,828 to $166,743) which helped drive overall total direct compensation increases of 3%.
  • More than half (55%) of organizations made changes to their pay programs in the most recent fiscal year. Exactly half of those organizations made changes to the annual cash retainer, while 59% adjusted the annual equity grant. Slightly over one-third of organizations (34%) made changes to their annual pay programs that include an adjustment to both the cash retainer and stock grant. Of the organizations that made a change to just one component of the cash retainer or equity grant, 25% changed the equity component of their pay program and just 16% adjusted only the cash retainer.
  • An uptick (12%) in the median one-time award value was fueled by higher stock prices year-over-year at organizations with share-based initial grants. The total value of share-based initial grants increased 35% for the 32% of companies that offered them. Organizations using value-based initial grant structures also contributed to the observed year-over-year adjustment, although to a lesser extent than their share-based counterparts. And, 20% of organizations with value-based initial grants made changes to their grant values last year.

Threshold Meeting Fees
While organizations continue to move away from variable pay elements such as board and committee meeting fees, some have established meeting policies that trigger payment in extraordinary cases. The review found that 8% of organizations maintain a threshold board or committee meeting fee policy under which meeting fees are paid out after attendance at a designated number of meetings (threshold) attended per year. The large majority of organizations (89%) that have threshold meeting contingencies in place did not otherwise pay meeting fees, but 38% did maintain committee member retainers.

Annual Compensation Limits
The number of organizations with an annual compensation limit continued to grow (63% vs. 55% previously). There were 16 newly established limits in the 2019 S&P 500; of these new limits, three-fourths were created as a combined fixed value cash and equity limit. Additionally, there were 18 compensation limits updated in the most recent fiscal year. 75% of those updated limits were changed to include cash compensation as part of an overall compensation limit. Four-fifths of companies now maintain a value-based limit (up 3% from last year’s 77%). The remaining 20% of limits are share-based. The values at the median continue to hold steady.

Board Leadership
A minor shift shows 53% of organizations separate the positions of board chair and chief executive officer, up from 52% in the prior year. Nearly three quarters (74%) of standalone board chairs serve in a non-executive capacity (40% of the full S&P 500). 96% of organizations with a non-executive board chair provide additional pay for such service, with the median value reaching to $160,000, a jump of 7%. Non-executive board chair compensation shifted slightly, and these chairs are now nearly twice as likely to receive an extra cash retainer versus additional equity compensation (88% and 45%, respectively) compared with 87% and 46% last year.

As the prevalence of separate board chairs continues to rise, the number of organizations which identify a separate lead or presiding director role fell to 68% from 71%. In contrast, 86% of organizations with a lead director pay an additional fee for serving in this position, up from 84% last year. Nearly all (97%) organizations that pay an additional fee to a lead director use an additional cash retainer, while just 10% grant an additional stock award.

Share Ownership and Retention
Stock ownership guidelines and retention requirements are nearly universal, with 95% of organizations having one or both. 82% of organizations have equity ownership guidelines based on a multiple of particular pay elements, and the overwhelming majority (92%) requires a multiple of the annual cash retainer. Multiples using the annual equity grant or a combination of cash and stock tie at 4% each. Meanwhile, 59% of retention requirements mandate a holding period lasting until the stock ownership guidelines are met.

Looking Ahead
Equity pay drove increases in director pay programs in 2018. It will be interesting to observe whether upcoming pay decisions focus on cash elements of pay to balance the traditional pay mix provided to directors as organizations compete with peers. Organizations must continue to review and adapt their pay programs to reflect board committees’ shifting responsibilities and the potential impact of decisions in external governance and litigious communities to establish reasonable compensation limits for directors.


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