The recent trend of splitting the chairman and CEO roles has remained fairly constant in recent years, according to a new Mercer analysis of S&P 500 companies. Specifically, 56% of firms used a combined chairman and CEO compared to 55% in 2012. The combined role is far more common at firms in the S&P 100, rising to 78% compared to 70% in 2012, than at smaller firms in the Other 400 where it remained at 48%. Meanwhile, the prevalence of premiums paid to lead directors and non-executive chairmen in 2014 rose to 78% and 91%, respectively. The size of the premiums showed little movement over the past few years, remaining at $22,000 for lead directors and $150,000 for non-executive chairman.
Mercer’s analysis is based on data from 67 S&P 100 companies and 186 other companies in the S&P 500 (Other 400). In 2014, median revenue for these companies was $13,045 million.
“There are advocates for both sides of the argument regarding independent chairs,” said Ted Jarvis, Mercer’s Global Director of Executive Compensation Data, Research, and Publications. “Splitting the role of Chair and CEO may create an effective, balanced governance structure in some cases. But changes in governance dynamics, including declassified Boards, annual reappointment of the Board chairman, and the designation of lead directors, can effectively moderate the CEO’s influence without resorting to an independent Board chairman. In that respect, it doesn’t appear that one of these governance paradigms is intrinsically superior to the other.”
According to Peter Oppermann, Partner with Mercer specializing in executive compensation, “Determining the appropriate Board leadership structure depends on a number of factors, including the company’s business strategy, current Board composition, and in some cases even success are taken into account. Importantly, a structure that works well for one company is not guaranteed to work well for all organizations.”
The prevalence of non-CEO executive chairmen declined over the past few years with 17% of S&P 500 companies having a non-CEO executive chairman in 2012 compared to 13% in 2014. Over the same period, the prevalence of non-executive chairman rose from 28% in 2012 to 31% in 2014. “For Boards that opt to split the CEO and chairman roles, an increasing percentage see merit in having a non-executive chairman primarily responsible for leading the Board and a CEO responsible for running the company,” said Mr. Jarvis. “Few have non-CEO executive chairmen, and those roles tend to be filled by former CEOs for a limited time.”
Although declining, the use of a CEO and a separate executive chairman has advantages, and some prominent, high-performing companies still utilize this structure. “An executive chairman is in the unique position to run the Board and facilitate communication between the Board and management team,” said Mr. Oppermann. “With so much knowledge and expertise among Board members, an executive chairman can keep the dialogue between the Board and management open and efficient, providing clarity to the CEO on strategic and tactical issues.”
In addition, firms undergoing a CEO transition can use the executive chairman role strategically in their management succession plan. “A great wealth of institutional knowledge is held by a departing CEO, and a few weeks of onboarding is simply not enough time to effectively hand over the reins,” said Mr. Oppermann. “Transitioning a CEO to executive chairman for a year or more provides stability to the organization and the opportunity to transfer guidance and advice to the incoming CEO.”
Compensation for Board Leadership Roles
As the leadership structure among Boards continues to change, the compensation received by those in the roles has stayed fairly consistent. Executive chairmen continue to be compensated similar to other senior executives. Median total direct compensation (TDC) for executive Chairmen was $6.6 million in 2014. Compensation for non-executive chairmen resembled other Board members, despite a significant premium for their additional responsibilities. Most (91%) of non-executive chairmen received a median premium of $150,000 for serving in the role in 2014.
Lead directors are increasingly likely to receive a premium for serving in their role. More than three-quarters (78%) of lead directors received a premium in 2014 compared to 70% in 2012. Moreover, the median premium received by a lead director in 2014 was $22,000 compared to $20,000 in 2012.
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