This primer is applicable to mid-market companies across several industries including technology, healthcare, manufacturing, real estate, retail and financial services.
For mid-market companies, the average board encompasses nine directors with approximately 80% of those being independent directors. There is a direct correlation between the size (revenues) of a company and board director compensation. For purposes of this discussion on mid-market companies, the revenue range is between $100M and $3B. If we are referring to financial services, this is in terms of assets and in that case, a range of $100M to $6B.
Overall, there has been little change in board compensation over the last few years, as well as the percentage balance between cash compensation and equity (typically 45% and 55% respectively). The components of board compensation I will review in today’s post include board retainers and fees, committee retainers and fees, stock options and full value stock rewards. A deeper detail of these components is below-
Board Retainers & Fees– this is the annual board retainer and all board meeting fees earned during the given year. This is derived from in-person meeting fees, conference call meeting fees and total board meetings held in the year; equates to approximately 40% of total compensation.
Committee Retainers & Fees– annual committee retainer and all committee meeting fees during the year; most directors serve on two committees; equates to approximately 5% of total compensation.
Stock Options– this is valued by the grant date fair value award that is reported by the company; equates to approximately 6% of total compensation.
Full Value Stock Awards– includes stock and stock unit awards; equates to approximately 48% of total compensation.
Total Compensation– includes all board retainers and fees, committee retainers and fees, stock options and full value stock awards.
Total annual board compensation breaks down to approximately $60,000 for board retainers and fees, $8000 for committee retainers and fees, stock awards of approximately $70,000, stock options of $10,000. Therefore, a total annual compensation of $155,000 on average – not a bad deal! The lowers end of the revenue range offers total compensation of approximately $120,000 while the higher end of the revenue range offers total compensation of $185,000. If you apply the percentages shared in each of the components, this will provide the dollar equivalent for the low and high revenue ends.
Board director compensation does vary by industry, with the technology industry being the highest compensated. Next in line is healthcare and the least compensated are board directors of banks. As for banks, the compensation is typically less than 25% of what technology companies compensate their board members. In terms of stock, technology and healthcare hold the highest percentages while banks offer the least in stock. Regardless of industry, stock awards are preferred over stock options.
As you can see, there is an overall greater compensation reward through stock options and full value stock awards. Many executives do not understand this and set their sights on the cash compensation (board retainers/fees and committee retainers/fees), which is not the way one should monetize the long-term value of independent directorships. In my opinion, if you can’t see beyond the cash, then you are likely not seeing the entire picture as a “shareholder” of the company and, in turn, should not be serving on boards at all.