The people who sit on the boards of America’s largest corporations got a modest raise last year. Corporate directors at Fortune 500 companies saw a three percent increase in their total direct compensation for 2015, rising to a median $263,500, according to a new report from the advisory firm Willis Towers Watson.
But over the past decade, the increase looks more substantial, rising a cumulative 65 percent since 2006, when median pay was just $160,000 — an annual rate of about five percent a year. That steady march upward, compensation experts say, reflects the expanding pressures on corporate directors, who must advise increasingly complex global corporations and take on much more risk in an environment with more rigorous governance standards.
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“There are much higher demands on directors in terms of governance, in terms of their time and in terms of their risk,” says Rob Mustich, a managing director at Willis Towers Watson. “It’s more difficult to attract directors than it was 10 years ago. It requires a much higher level of engagement, and not just checking off the box for the amount of meetings they attend.”
Despite those demands, it is still a decent chunk of change for a job that remains part-time for many. According to a 2015 survey by the National Association of Corporate Directors of its members, directors spent 248 hours, on average, doing board-related work, such as attending board and committee meetings, informally advising management or reviewing reports in the past year. At that rate, the average director would seem to be earning a little more than $1,000 an hour, using the new report’s median compensation figure.
But NACD president Peter Gleason says the comparison isn’t that simple. For one, their survey skews toward small or midsize companies, where the number of hours directors spend on the work may be less than for large multinational corporations. “Fortune 500 directors laugh at it,” he said, often citing the workload can lead to 600 or 700 hours a year. “Some people say it’s a full-time job.”
Meanwhile, “you’re not just paying for that hour. You’re paying for the experience they bring to the table. You’re paying for them to be on call” all year. Bring a top consulting firm in to offer similar advice to the management team, Gleason says, “and they’d be here six weeks and you’d spend that much.”
The structure of directors’ pay reflects that trend toward more ongoing, informal advice. Companies are increasingly shifting cash paid for meeting attendance fees into larger annual cash retainers instead.
“This started quite a while back,” Gleason says, with boards saying “what we’re going to ask you to do is be on call all the time.” The demands of the job between meetings helped lead to the annual cash retainer jumping above $100,000 for the first time last year, according to the report.
A significant portion of directors’ pay is also typically made in stock, in an effort to keep board members’ interests in line with shareholders. Willis Towers Watson’s report shows that the average mix of pay last year was 57 percent in stock and 43 percent in cash, relatively similar to the year prior.
Some companies pay directors even more heavily in equity-based compensation. An analysis by the Wall Street Journal in February, for example, found that each director’s 2014 compensation at Regeneron Pharmaceuticals was valued at $1.7 million or more; the company’s 2016 proxy statement, released in April, shows director compensation valued at $2 million or more in 2015.
In an emailed statement, a Regeneron spokeswoman pointed to the sharp rise in the company’s share price – it was the best-performing stock in the S&P 500 for the five years ending Dec. 31, 2015 – and the company’s primarily options-based approach, which makes up some 90 percent of director pay.
“We believe this aligns board compensation to the creation of future shareholder value, as any value from the stock option awards is realized only if the stock appreciates,” she said in the statement, which also noted directors’ cash pay “is about average for our industry and below median for our peer group.”
Meanwhile, the most a Berkshire Hathaway director made last year was $7,000. In his 2014 letter to shareholders, the Journal reported, CEO Warren Buffett wrote that “none took the job for the money.” Instead, they purchase Berkshire shares and receive “the satisfaction that comes from being good stewards of an important enterprise.”
Even if director compensation is rising, boards do appear to be more concerned about the issue. The new report shows that 42 percent of companies now have caps on the stock grants individual directors can receive, and half of those have been adopted or amended just since last year. Mustich says that’s partly driven by recent litigation that could make it easier for investors to take legal action on directors’ compensation.
But it’s also because directors realize that as executive pay comes under increasing scrutiny, their pay could be, too.
“They need to set the standard or set the example that their pay should be set competitively,” Mustich says. “If not, it sends a message to executives.”
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