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DIRECTOR COMPENSATION AT PRIVATE, FOR-PROFIT COMPANIES
Over the past decade, corporate scandals, questionable accounting practices
and rising executive pay levels have focused attention on corporate
governance and the role of the members of the board of directors. While
the fiduciary
duties of the corporate director have not changed, directors are spending
more time preparing for and attending board and committee meetings
than ever before. Additionally, it could be argued that directors are
taking
on more financial and ‘reputational’ risk related to their
board service. It is not surprising, then, that pay programs for directors
have been the target of much attention recently.
Although the fall-out from the scandals and the new legislation has focused
attention on boards at publicly-traded companies, directors at private companies
are also affected. Therefore, compensation programs for the directors of
private, for-profit companies should be designed carefully to attract well-qualified
directors to serve on private boards.
Design of Director Pay Program
At public and private companies alike, there are several issues to consider
when designing a pay program for members of the board of directors. In general,
pay programs for directors often include some combination of the following
components:
- An annual retainer paid in the form of cash or company stock, or a
combination of cash and stock
- Fees for attendance at board and committee meetings
- Fees for serving as chair of committee
- Reimbursement for out-of-pocket expenses related to board service
- Other benefits or perquisites such as life insurance, charitable giving,
product discounts, etc.
A 2005 article in the WorldatWork Journal describes the ways in which these
pay components can be combined to achieve the goals of the director pay program:
“As with employee compensation, there are several different
models for director pay programs. At one extreme, all directors are paid
a flat
fee in the form of cash or equity, with no differentiation among the
board members. There is no additional payment for attending committee or
board
meetings or for serving on certain board committees. While this approach
acknowledges the importance of the role of all directors and their accountability
to shareholders, it does not recognize the differences in the amount
of time and effort put forth by individual directors with different roles
within
the board structure. In fact, this approach might discourage directors
from assuming significant roles on the board. It also might create inequality
among directors with different degrees of commitment.
At the other extreme, a director pay program can be completely variable.
Under this approach directors are paid different amounts depending upon the
number of meetings they attend, their committee and leadership assignments
and other special duties they perform. Under this approach, there is no annual
retainer or fixed grant of equity-based awards, and the directors who make
the largest contributions to the board (and presumably to the shareholders)
receive the greatest rewards. On the other hand, piece-work or hourly-rate
pay arrangements downplay the importance of the unique role and responsibilities
held by directors.
The vast majority of director pay programs fall between these two
extremes. The typical package includes an annual retainer and an
annual grant of
an equity-based award as well as variable pay for attending meetings
and serving
on or leading board committees.”(1)
Director Pay Programs for Private Companies
Private companies have to consider additional issues when designing a director
pay program. The first decision to be made is whether to pay directors for
their service. These days, many private, for profit companies have concluded
that they must pay the outside directors serving on their board in order
to attract the most qualified director candidates to their board.
The next issue to consider is the form of the pay offered to directors.
Privately-held companies often do not have a mechanism for granting equity
in the company. In this case, some private companies establish phantom
equity plans, which transfer an amount equal to the appreciation of the value
of
the company’s stock without transferring ownership or voting rights.
However, even this approach can be troublesome for private companies which
do not regularly perform a valuation of the company’s stock. Therefore,
it is not surprising that some private companies decide to pay their
directors entirely in cash rather than equity. On the other hand, some
private companies
at the beginning of the corporate life cycle are low on cash and prefer
to pay directors in some form of equity, such as stock options.
(1) WorldatWork Journal, First Quarter 2005, “Director
Pay – Current Trends and Practices” by Paula Todd and Annalisa
Barrett.
Results of CDF Hot Topic Survey:
Director Compensation at Private, For-Profit Companies
The Corporate Directors Forum conducted a survey of director
pay practices at privately-held, for profit companies in the San Diego area.
Although the sample for the survey was small (fewer than 20 companies), the
findings are informative:
- Over half (54%) of boards surveyed pay directors an annual cash retainer
for board service
- The median annual cash retainer for board service is $15,000
- The range is $2,000 to $26,000
- Nearly one-third (31%) of boards surveyed pay directors a cash fee per
board meeting attended
- The median cash board meeting fee is $1,000
- The range is $500 to $2,000
- One board grants directors an equity-based award (rather than a cash
fee) for attendance at board meetings
- Two boards pay directors a cash fee for attending board meetings via
telephone
- One board pays a flat fee per telephonic board meeting
- Another board pays directors an hourly rate for attending telephonic
board meetings
- Very few boards surveyed (15%) pay audit and compensation committee members
a separate fee for attending committee meetings
- One board pays a flat fee per committee meeting
- Another board pays directors an hourly rate for attending telephonic
committee meetings
- Committee chairs are not paid an additional fee for their service, among
surveyed boards
- Nearly one half (46%) of boards surveyed provide an equity-based award
to directors upon their election to the board
- Nearly two out of five (38%) boards surveyed offer directors an equity-based
award each year
- It is most common for the equity-based awards to take the form of stock
options
Provided By:
Annalisa Barrett
The Corporate Library
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