Mercer’s latest analysis of directors’ compensation shows median total direct compensation increased 3% – the lowest year-over-year change in years – for directors at S&P 500 companies.
According to Brant Shelor, Partner at Mercer specializing in executive rewards, “Larger pay increases in prior years likely reflected boards reacting to increased demands due to regulatory shifts such as the Dodd-Frank Act and mandatory say-on-pay voting. This recent slow-down in director compensation increases indicates that boards have made the enhanced activity part of their ongoing core business.”
For the S&P 500, the median cash retainer increased from $65,000 in 2010 to $75,000 in 2012. The largest increases were at the 400 smaller companies ($60,000 to $75,000), while the median at the S&P 100 increased from $85,000 to $90,000.
From 2010 to 2012, the prevalence of companies paying meeting fees declined from 42% to 33%. Among the S&P 100, the prevalence is even lower (30% in 2012). For those companies that pay them, the fee has remained at $2,000 for the past three years.
As meeting fee use declines, companies are shifting variable pay into fixed retainers. The shift away from meeting fees underscores a change in the way boards work.
“The challenges of corporate governance require flexibility with respect to time commitments,” said Ted Jarvis, Mercer’s Global Director of Executive Compensation Data, Research and Publications. “Pay-for-effort – how much time one spends on board affairs – is less relevant today than ensuring directors are fully engaged with the companies of the boards they serve. Directors aren’t paid incremental fees for email exchanges, preparation time or a host of other activities so does it make sense that meetings are the sole exception?”
Equity compensation is paid at approximately 95% of the S&P 500 companies. About 80% determine the equity portion as a fixed value, rather than a fixed number of shares. From 2011 to 2012, the value of equity compensation increased at 57% of companies and decreased at 39% (3% eliminated equity compensation altogether).* Median equity compensation rose from $120,000 in 2010 to $130,200 in 2011 and $135,000 in 2012.
The practice of granting stock options or SARs to directors continued to decrease in prevalence from 26% in 2010 to 23% in 2011 and 19% in 2012. Yet the prevalence of full-value shares increased from 94% to 96% over the same period. The majority of companies (80%) grant only full-value shares, while granting just stock options declined (6% in 2010, 5% in 2011 and 4% in 2012. According to Mr. Shelor, “As directors embrace the role of acting on shareholders’ behalf, full-value shares provide excellent alignment as directors experience value changes as any other shareholder would.”
As with general board service, committee meeting fees are becoming a minority practice, declining from approximately 40% of organizations analyzed in 2010 to 35% in 2012.
Audit committee members are more likely to receive a cash retainer (38% in 2012), while 25% of Compensation committee members and 24% of Governance committee members receive a retainer. The value of the cash retainer for Compensation and Governance committee members is on the rise. Since 2010, pay for Compensation committee members increased $2,000 (to $10,000) and pay for Governance committee members increased $1,000 (to $7,500). The retainer for Audit committee members remained at $10,000.
“We’re witnessing a plateau in the pay for Audit committee service, while pay for Compensation and Governance committee service is going up,” said Mr. Jarvis. “Audit still compensates the most, but the increases in these other committees reflect an evolution in their relative prominence with respect to board affairs. As with Audit members, Compensation committee members are now expected to play an active role in evaluating risk. Stakes for the Governance committee have been raised, as well.”
Mr. Shelor points to more critical investor and regulatory scrutiny of compensation decisions as a key dynamic in the rising pay for Compensation committee work. “Managing say-on-pay and the related optics is becoming increasingly demanding, so companies are recognizing the considerable efforts put forth by Compensation committee chairs and members,” he noted.
Mercer’s analysis is based on proxy statements filed with the SEC between 2011 and 2013. The peer group was the S&P 500 as it was comprised on January 1, 2013. Median 2012 revenues for this group were $8.422 billion. For more information about executive rewards programs, visit http://www.mercer.com/what-we-do/workforce-and-careers.html.
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer's more than 20,000 employees are based in 42 countries, and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.
# # #