Understanding Board of Directors Compensation

Along with the mystery of how to land the first board seat, comes the second mystery – understanding board of directors’ compensation.  As potential clients of Summit Executive Resources consider the path to independent directorships, we are often asked for our insights into what components and how much is in board of directors’ compensation.  Although the following is not all inclusive and there are certainly anomalies, it will provide some measure of what is considered typical board of directors’ compensation in a publicly traded mid-cap company —

Board Compensation Components

Publicly traded board compensation is usually composed of at least three, but sometimes five components –

• Retainer – The board retainer is the minimum amount of cash paid for holding a seat on the board and being available for board and committee meetings.
• Meeting Fees – Approximately ten years ago, most companies paid an incremental fee which ranged from $1,500 to $5,000 per board and committee meeting attended. Although the percentage of companies that have compensated in this manner is not clear, some public companies continue to follow this practice.  More currently common, many boards have included these fees in the retainer for a given number of meetings per year.  There are typically four or five meetings per year.  In addition, most companies still have additional meetings fees for special or ad hoc meetings over and above the normal meeting dates.
• Chair & Lead Fees – There is also additional cash compensation for the Board Chair, Lead Director and Committee Chair positions. The Board Chair fee can be quite substantial and sometimes double the base retainer.  The Audit Committee and Compensation Committee Chairs can receive anywhere from $10,000 to $25,000 of additional cash compensation.  Other committee chairs might receive less. Fees are also paid to board members who serve on a committee(s) but do not necessarily chair a committee.
• Stock – Nearly 100% of public company board compensation includes a restricted stock award each year. Sometimes the stock award is a very significant amount of value with a vesting period of usually a year to two at the most.  This portion of the compensation can be highly underestimated by board candidates and often gets lost in translation when it comes to the total “value’ of the entire board compensation package. It is unfortunate when board candidates decline a potential opportunity when their focus is on only the cash components of the compensation.
• Other Perks – You will find that some companies provide their board members with limited perks. These perks can include access to deferred compensation or pension programs, private air travel for board meetings and possibly for personal travel, access to company offices, as well as secretarial and administrative services. With that being said these types of perks have been less prevalent in recent years.

Other Compensation Insights

Many individuals will attempt to link board fees with the size of company revenue.  We have found that using the size of company revenue alone does not validate  the likelihood of a given company’s board compensation package.  revenue may be  one element of determine board compensation, it is also important to consider growth percentages  of the given industry and target company.  Other considerations should be whether the company is publicly traded, privately-held, or private equity owned.  addition, one should focus on determining how much stock is in addition to the cash which is usually greater.

A gauge when determining board compensation, a mid-cap company with revenues between $500M and $2B in revenues, or a $1B publicly traded technology company could provide a cash component in the range of $60,000 to $70,000 annually.  Adding in stock, the total compensation can range between $185,000 to $250,000 annually.

Most importantly and above all, board compensation fees are not negotiable.  When you agree to sign up for a corporate board, you will receive the compensation that has already been determined by reviews of compensation of peer companies and possibly by an outside consulting firm..   While this does not provide all of the answers to board compensation, it does support the point that each and every board situation should be looked at individually and encompass all of the components before considering if the opportunity is “worth it”.  In the end, you are participating on this board, because you have interest in the company, are compelled by the opportunities and challenges, can deliver differentiating value to the board and are a shareholder with fiduciary responsibility.  Simply said, it is not all about the cash.