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Many corporate boards of directors are facing a predicament in setting their own compensation, finds a new report from The Conference Board in collaboration with Semler Brossy and ESG data analytics firm ESGAUGE.
On the one hand, most boards may find it inappropriate to increase their compensation during this pandemic. On the other, many have a strong rationale for increasing their pay: The sheer volume and scope of their work has increased, due not only to COVID-19, but also to their expanded role in overseeing areas ranging from human capital management to a broad range of social and environmental issues. In addition, as boards seek to attract a new breed of candidates with specialized skills and diverse backgrounds, luring those individuals may require offering more attractive compensation packages.
To help navigate these challenges, the new report reviews trends and developments in board compensation at US public companies. The analysis covers the S&P 500 and the entire Russell 3000. In addition, a public dashboard complements the report, allowing users to access and manipulate the data online.
Among the insights for what’s ahead from Director Compensation Practices in the Russell 3000 and S&P 500: 2021 Edition:
In 2020 filings, director pay continued on the upward trends reported in recent years, as figures reflect decisions made before the pandemic.
- Median total compensation awarded to a board member in the latest fiscal year (most often, 2019):
- Russell 3000: It was $189,980, marking a 4.6 percent increase from the previous fiscal year.
- S&P 500: It was $280,000, marking a 1.8 percent increase from the previous fiscal year.
- The primary factor driving these changes was the rise in the value of equity awards.
- Russell 3000: The median value of equity awards increased by 7.6 percent since the prior year, from $110,000 to $118,355.
- S&P 500: The value of such awards increased by 2.4 percent since the prior year, from $165,000 to $168,933.
- The highest and lowest increases in the median value of Russell 3000 total compensation by sector:
- Highest year-on-year increases: Materials and Finance sectors (8.2 percent and 7.1 percent, respectively).
- Lowest year-on-year increases: Consumer Staples and Consumer Discretionary sectors (0.9 percent and 0.7 percent, respectively).
“The disparity in total compensation pay increases for directors can be in part attributed to the fact that it is rarely adjusted annually. It is more likely to be increased only once every three, four, or even five years—a practice we expect to continue,” said Matteo Tonello, Managing Director of ESG Research at The Conference Board and a co-author of the report. “Compensation committees typically do not want to increase director pay by incremental amounts, generally waiting until a substantial market correction is necessary before recommending changes.”
Since the onset of the pandemic, a significant proportion of boards temporarily reduced or eliminated their pay. Despite the exponential growth in board members’ workload, the current disclosure season will likely reveal an end (or pause) to rising director compensation.
- While the median total compensation of directors recorded in 2020 filings increased, the data on total actual compensation from this year’s proxy statements will likely paint a different picture. Not only were director retainers reduced during the pandemic, but due to economic challenges of various kinds, it is likely that anticipated or planned increases will have been postponed.
- Several other factors are putting downward pressure on total actual compensation:
- The trend away from per-meeting fees (toward fixed-fee retainers) will mean there is no compensatory upside to the increase in meetings in response to the pandemic.
- The volatility of the stock market may have had a dampening effect, at least initially, on the “take-home” value of director compensation.
“In the past, a marked rise in the number of boards meetings or the formation of special committees—which the fallout from COVID-19 prompted—would have led to an increased level of compensation for directors,” said Mark Emanuel, Managing Director at Semler Brossy and a co-author of the report. “However, under the current ‘retainer-only’ paradigm for director pay—which reflect the fact that directors’ responsibilities are ongoing and not just related to attending meetings—this increased workload is unlikely to have similar effects.”
Recruiting a new breed of diverse directors with different experience and skills may require significant changes to director pay structures. That includes adjusting compensation levels upwards to make posts more attractive to in-demand talent.
- While there is a strong impulse to constrain pay levels given the current circumstances, many companies must keep their director compensation policies attractive to a diverse slate of candidates in the evolving business landscape.
- The new demand for diversity in the boardroom may further accentuate the director recruitment challenges encountered by smaller companies and in certain industries.
- Indeed, almost twice the proportion of Russell 3000 companies (21.8 percent, according to 2020 disclosure) offered a sign-on equity grant to newly elected directors. However, only 12.3 percent of S&P 500 companies did the same.
“The market for qualified directors is very strong. In order to attract the set of skills and experience needed today, they may want to consider using sign-on equity grants or offering a choice among compensation packages with different equity/cash mixes,” said Todd Sirras, Managing Director at Semler Brossy and a co-author of the report.
Committee compensation may be in for a reshuffle as director responsibilities and workloads change. Some of the increasingly high-priority issues do not fall under the purview of the audit committee, which typically has the highest supplemental committee member compensation.
- As the workload and breadth of directors’ responsibility rises, it may lead to director pay levels in the form of increased supplemental retainers for committee service.
- For example, responsibility for overseeing human capital management (HCM) is now often assigned to the compensation committee and/or nominating and governance committees.
- Further, nominating and governance committees are assuming a broader role with respect to ESG issues.
- Thus, incremental compensation for the service on (and the leadership of) those committees may increase and catch up to audit retainers.
“Without increasing the overall amount spent on director compensation, boards may also wish to consider raising the base retainer for all directors, while eliminating additional compensation for committee and leadership positions,” said Paul Hodgson, a Senior Advisor to ESGAUGE and a co-author of the report. “A uniform retainer that compensates all directors equally would avoid trying to predict which committee or director will be working harder in any given year. Simplification would have the added benefits of eliminating any financial impediment to committee or leadership rotation, as well as likely being well received by investors, who tend to favor more simplified director compensation arrangements.”
About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what’s ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org
About Semler Brossy
Semler Brossy is a leading independent executive compensation consulting firm. We serve a broad cross-section of companies across industries, from the largest global corporations to smaller, privately held firms. We partner with Compensation Committees and management teams to develop and apply compensation solutions to support corporate strategy and ensure sound governance. Clients trust our experience and foresight to help them turn Complexity into Clarity in compensation and governance. www.semlerbrossy.com
ESGAUGE Analytics is the intelligence platform and help desk uniquely designed for the corporate practitioner and the professional service firm seeking customized data on U.S. public company disclosure of environmental, social and governance (ESG) practices. Our clients include business corporations, compensation consultants, law firms, accounting firms, and investment companies. We also partner on research projects with think tanks, academic institutions, and media companies. ESGAUGE Analytics intelligence is tailored to specific empirical information needs, with segmentations by select peer groups, business industry, and multiple company size dimensions. Data insights are tagged and hyperlinked to underlying sources. www.esgauge.com