Compensation among outside directors at the country’s largest corporations faced modest gains for the second successive year, suggesting salary increases for these positions are back to prerecession levels, according to an annual analysis by global professional services company Towers Watson.
Additionally, the analysis reveals that while overall pay levels held mostly stable, companies are still looking to improve their director pay packages’ designs, which is attributed to internal and external pressures. In 2011, compensation for directors rose 5 percent from 2010, similar to the 6 percent median increase in 2010. The higher compensation is mostly due to increasing levels of stock compensation as a mirror of growing stock prices for many U.S. companies in 2011.
According to the analysis, total direct compensation jumped in 2011 to a median value of $220,000, marking a 5 percent increase from $210,266 in 2010. The analysis defines total compensation as cash pay and annual or recurring stock awards. Equity award values also grew, hitting $124,986 in 2011 from $114,728 in 2010 for a 9 percent increase, and cash compensation rose by nearly 4 percent to $92,500 in 2011 from $89,000 in 2010. Pay mix contained about the same combination of compensation as in 2010. Fifty-five percent of director pay stemmed from equity in 2011, and the remaining 45 percent was from cash.
“It appears that pay for outside directors has returned to a pattern of more steady increases, and the rate of growth is aligned with what we see in executive total compensation increases,” says Doug Friske, global head of executive compensation consulting at Towers Watson. “The demand for strong, talented directors to serve on boards continues to grow, which could, in turn, place upward pressure on how companies compensate their directors in the future. Rising stock prices will also likely contribute to higher director pay values, though declines could stifle any continued growth.”
In order to continue fixed retainers for service, employers are continuing to eliminate board and committee meeting fees, the analysis finds, as 32 percent of companies paid board meeting fees in 2011, representing a strong fall from 62 percent in 2004. Fewer companies at 37 percent paid committee meeting fees in 2011, down from 64 percent in 2004.
Forty percent of companies keep the roles of CEO and board chair disconnected, which is approximately the same from 2010, the analysis shows. Nonexecutive board chairs received a median of $150,000 in incremental pay from what was offered for regular board service. Companies have increasingly established stock ownership guidelines as well as retention policies for their director pay programs. While 87 percent of companies had either or both types of mandates in 2008, 83 percent had the same in 2010. Despite this, the median value of stock ownership required for directors subject to stock ownership guidelines kept at $300,000 in 2011.
“With directors facing intensifying scrutiny of their performance and effectiveness, companies may feel compelled to reevaluate their director pay structures to ensure that their board members are appropriately compensated,” Friske says. “However, major change does not appear on the horizon.”