Pay programs continue to shift from meeting fees to retainers and from cash to equity
Mercer’s most recent analysis of director compensation programs at 171 companies in the S&P 500 shows that total compensation for a director (defined as Chair of the Compensation committee and member of the Audit committee) increased slightly in 2014 to just more than $263,000. Year over year, cash compensation was flat while equity compensation increased marginally. Retainers and meeting fees were unchanged, as well.
“Following a few years of incremental increases to board retainers, companies are hitting the brakes a bit,” said Ted Jarvis, Mercer’s Global Director of Executive Compensation, Research, and Publications. “But as companies eliminate per-meeting fees, some are increasing the size of their cash retainers. If this trend continues, the $80,000 plateau for annual retainers may not endure.”
While the use of annual cash retainers (99%) and annual equity grants (98%) remained nearly universal for board service, meeting fees continued to lose favor. Just more than one-third of companies paid board meeting fees to their directors in 2014 compared to 40% in 2012. According to James Vaughan, a Principal with Mercer specializing in executive compensation, this trend reflects differing points of view about how directors should be paid. “Companies are simplifying their approach and moving to a model that focuses on compensating for governance and oversight, rather than paying for activities. Eliminating meeting fees shifts the emphasis from attendance to the annual service provided on behalf of shareholders.”
A similar trend in pay occurred at the committee level. “Quite a few companies have replaced committee meeting fees with larger retainers,” said Mr. Jarvis. “Since these changes had little effect on total compensation for committee service, the increases in retainer amounts were set at levels that approximated total annual meeting fees in previous years.”
Board equity grants increased from a median $135,000 to $145,000 last year. Most (89%) of the companies impose stock ownership guidelines on their directors, with a majority of guidelines being based on a multiple of the cash retainer. “The adoption of stock ownership or stock retention guidelines for directors has increased the emphasis on equity as board compensation has grown over time,” said Mr. Vaughan. “Furthermore, equity compensation provides economic alignment with shareholders, supporting a focus on board compensation being paid for governance and oversight.”
Mercer’s analysis showed compensation for service on board committees did not change in 2014. Total pay for Audit, Compensation, and Nominating committee members was flat at a median $15,000, $10,000, and $8,000, respectively. Premiums paid to Audit and Compensation committee chairs remained flat as well, at $20,000 and $15,000, respectively, while the premium paid to the Nominating committee chair increased slightly from $10,000 to $11,000.
“The differences in pay for Audit, Compensation, and Nominating committee service, which have existed for years, suggest a pecking order in the value of these functions,” said Mr. Jarvis. “To an extent, the pay hierarchy reflects the various roles that the Audit, Compensation, and Nominating committees serve in the management of risk. The year-over-year stability in pay for service on each committee may indicate that these roles are more or less fully valued in the current economic and governance climate.”
Use of equity vehicles also continued to evolve in 2014. Mirroring a similar trend in executive compensation, stock option usage dropped to just more than 15% of companies compared to 20% in 2012. Approximately 85% of companies granted full-value shares exclusively, while only 2% used stock options as their sole equity vehicle and 13% used a combination of the two. “The shift away from stock options reflects an evolving consensus that the risk profile of stock options as a compensation tool is not appropriate for directors,” said Mr. Vaughan. “Full-value share awards more effectively promote stock ownership and strengthen the alignment of directors’ and shareholders’ interests.”
Mercer’s analysis is based on compensation data from 35 S&P 100 companies and 136 other companies in the S&P 500 (Other 400). In 2014, median revenue for these companies was $12,369 million.
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