Mercer’s latest analysis of compensation and benefits for directors’ compensation at companies in the S&P 500 reveals longstanding trends continued in 2013. Median total direct compensation increased 5%, an uptick over last year’s gain of 3%. The year-over-year increase in compensation for general board service was 7%, reflecting higher cash retainers and equity compensation values.
“Some companies may have been reluctant to increase directors’ pay during the recession,” said Teresa Bayewitz, Principal with Mercer specializing in executive and board compensation. “With the economy on the mend, companies may now be trying to recover several years of increases in a single adjustment, resulting in more significant year-over-year increases than we’ve seen in the recent past.”
According to Mercer’s analysis, only 30% of companies in the S&P 500 paid meeting fees for board service in 2013 – a meaningful shift from 2011 when 36% of S&P 500 firms paid these fees. Among the S&P 100, the prevalence was even lower (23% vs. 26% in 2011). The remaining S&P 500 companies showed a consistent decline as well (32% vs. 39% in 2011). For those companies that pay meeting fees, the amount remained unchanged in 2013 at a median of $2,000.
“The decline in board meeting fees reflects a shift in the way boards operate as cohesive, governing units,” said Ted Jarvis, Mercer’s Global Director of Executive Compensation Data, Research, and Publications. “Shareholders rely on board members to be consistently engaged with companies on the board they serve. Generally speaking, meeting fees may not be the most effective means to support that purpose.”
Offsetting the decline in meeting fees, the prevalence of annual cash and equity retainers continued to grow. Annual retainers were paid at nearly all (98%) of S&P 500 companies. Among these companies, the retainer increased from a median of $75,000 in 2012 to $80,000 in 2013. The largest increases were observed at S&P 100 companies, where the annual retainer increased from a median of $90,000 in 2012 to $100,000 in 2013. For the companies that eliminated meeting fees in 2013, 80% increased their annual retainers, most likely with the goal to keep total cash compensation stable year over year.
Only a handful of S&P 500 companies did not grant some type of equity compensation to their directors in 2013. At the median, equity compensation increased 7% from $130,800 to $140,400. The majority (85%) of companies determined equity compensation by targeting a fixed dollar value. Those that grant a fixed number of shares or options saw the dollar value increase. The median increase was approximately 9% due to escalating share prices last year; the S&P 500 Index appreciated 26% in 2013.
Stock options and stock appreciation rights (SARs) continued to fall out of favor for companies in the S&P 500. In 2013, just 17% of companies granted them compared to 24% and 20% in 2011 and 2012, respectively. The prevalence of full-value shares increased from 94% to 97% over the same period. The majority (83%) of companies granted only full-value shares, while those that granted only stock options continued to decline (6% in 2011, 4% in 2012, 3% in 2013).
“The continuing decline of stock options for directors in favor of full-value shares reflects the prevailing governance trend to limit directors’ risk profile vis-à-vis the companies they govern,” said Ms. Bayewitz. “The trend is consistent with evolving governance around the world in the aftermath of the financial crisis.”
Median total direct compensation for board service, assuming membership in the Audit and Compensation committees, increased 5% from $229,100 in 2012 to $240,000 in 2013. Absent the committee membership, total direct compensation for general board service increased 7% from $220,000 in 2012 to $235,100.
Changes to the structure of compensation for committee service echoed trends in general board service with fewer companies paying meeting fees and more providing annual retainers.
“The preferred method for S&P 500 companies to compensate directors for committee service clearly has shifted,” said Mr. Jarvis. “Over the past three years, we’ve observed the prevalence of retainers rising and meeting fees declining. This strengthens the idea that committee service, like board service, now entails far more than attending meetings or casting a periodic vote.”
The prevalence of Audit committee (40%) retainers led the Compensation (27%) and Governance (26%) committee retainers by a wide margin in 2013. Usage of retainers in general has inched up over the past three years with the largest increases in the Governance and Compensation committees (up 22% and 24%, respectively in 2011). During this period, the prevalence of Audit and Compensation committees providing meeting fees slid from 37% to 32%, and the prevalence of Governance committees providing meeting fees fell from 36% to 31%.
The amount of committee retainer and meeting fees did not change from 2011 to 2013. Audit and Compensation committee members received a median $10,000, while Governance committee members received $7,500. Median committee meeting fees were $2,000 for all three committees over the same period. However, members of Audit committees at companies that paid fees can expect a premium due to the higher number of Audit committee meetings (8) typically held each year. The median number of Compensation and Governance committee meetings held in 2013 was 6 and 5, respectively. Committee chairs typically received a higher retainer than that provided to other committee members. The prevalence of premiums was 94% for Audit chairs, 93% for Compensation chairs, and 90% for Governance chairs with median amounts of $17,500, $15,000 and $10,000, respectively.
Mercer analyzed proxy disclosures for the S&P 500 (as it was comprised on January 1, 2014) that disclosed compensation data between 2011 and 2013. Year-over-year percent changes are calculated on a company-by-company (rather than median-to-median) basis.
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