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Report: Changing Business Needs Will Drive Next Level of Innovation in Director Compensation
To help inform discussions on board director compensation structure and process, organizations can turn to a new report and online dashboard. Both products were developed by The Conference Board in collaboration with Semler Brossy and data analytics provider ESGAUGE.
Made available to the public, the online dashboard provides a comprehensive set of benchmarking data and analysis. It features the most recent corporate disclosure by Russell 3000 companies, including individual elements of compensation packages, supplemental compensations for committee service and leadership roles, stock ownership and retention policies, pay limits, and deferred compensation schemes.
The data and insights come at a time when the responsibilities of corporate directors are changing radically in response to immediate business challenges and longer-term evolution in the balance between shareholder and stakeholder priorities. Board experience and activity must encompass a broader range of skill sets to help address these challenges. Companies will likely rethink some aspects of their director compensation policies to identify and compete for desirable candidates – including those from younger generations not currently serving on Boards – and to encourage continued professional development of existing directors.
Additional insights in the new report – driven by data curated from the dashboard – include:
Director compensation increases are likely post-pandemic. Board service and specific expertise at the committee level will drive these increases.
- Why: In recent years, board members have been tasked with more direct oversight responsibilities on a broader range of ESG and Human Capital Management (HCM) matters. In addition, the COVID-19 crisis will dominate board agendas of all companies in 2020 and demand an unprecedented level of time commitment. These trends may create new committees or expand charters of existing committees, drive changes in supplemental retainers for committee service, or even result in greater growth in base retainers for board service, given that all directors will face an increased workload that does not correspond to service on a particular committee. We expect this trend to evolve when the COVID-19 pandemic passes, given that many companies are currently temporarily reducing director compensation.
- What the data reveal: Board retainers typically increase by 4-5 percent annually, with pauses during times of crisis. Historically, audit committee service and leadership have demanded a pay premium relative to compensation and nominating/governance committees. For example, the most recent data show that audit committee members earn, at the median, an annual supplemental retainer of $10,000, compared to $7,500 for compensation committee members and $5,000 for nominating/governance committee members.
New director compensation program features may be a valuable tool to recruit new, often younger, qualified candidates to boards, and to support the ongoing development of existing directors. In general, companies could consider:
- Providing one-time equity awards to new directors.
- Why: Offering such awards to new directors may help attract and retain top talent in coveted areas of expertise, including technology and bioscience. They can also assist younger and non-traditional directors accelerate their economic alignment with shareholders, provided that the equity grants have appropriate vesting and ownership or retention requirements.
- What the data reveal: A growing number of companies have discontinued this practice in recent years. Based on 2019 disclosure documents, only 22.4 percent of Russell 3000 companies provide a sign-on equity award to their board members. The highest percentages are seen among information technology (44.9 percent) and health care (61.8 percent) firms.
- Supporting educational and peer-networking benefits.
- Why: Companies may want to offer perquisites such as business association memberships, the opportunity to participate in industry conferences, and the reimbursement of tuition fees for corporate governance courses at leading universities. Such benefits may appeal to a younger generation of board members, many of whom want to expand their professional associations, raise their public profiles, and enhance their understanding of governance and the company’s business, thereby helping them to become more effective directors more quickly.
- What the data reveal: In the last decade, there has been a significant shift away from the use of perquisites in director compensation. As of 2019, only about a quarter of Russell 3000 companies still incur tuition fees for their board members’ education. The majority of companies opt for their own in-house onboarding and continuing education programs.
- Offering matches for contributions to charity.
- Why: Research shows that younger generations of executives have been more enthusiastic to embrace the shifting paradigms around corporate citizenship. Further advancing that value can be achieved by, among many other steps, extending to board members the eligibility for charitable contribution matching programs already offered to employees.At the same time, companies need to be vigilant to make sure that their matching contribution programs are consistent with their regular philanthropic practices and do not cast doubt on a director’s independence.
- What the data reveal: While this practice is instituted at 33.1 percent of S&P 500 companies (and as much as 57.1 percent of those with annual revenue of $50 billion or higher), it is found at less than 10 percent of Russell 3000 companies.
“As companies face competition for top talent to their boards, they will want to consider fresh and innovative strategies on the compensation front,” said Matteo Tonello, Managing Director of ESG Research at The Conference Board. “Rather than shy away from such pursuits, they should be creative in structuring their compensation program in a way that not only attracts these directors, but also serves the company’s and shareholder interests. Along with providing for appropriate safeguards to preserve director independence and alignment with shareholder interests, companies should ensure that their market disclosure thoroughly describes the rationale for adopting diverging practices and adequately documents the difficulties around attracting the best and brightest in key areas of board expertise.”
“The evolving debate on corporate purpose, ESG, and HCM is increasing the oversight required by Boards and is expected to have long-term impacts on director compensation,” said Mark Emanuel, Managing Director at Semler Brossy. “Three long-term trends will influence future director pay design. First, the expanded board mandate will continue to fuel the low- to mid-single digit average annual increases in director pay levels we have seen in recent years. Second, board communication with external stakeholders on broader topics may drive larger increases in leadership pay. Finally, committee pay levels may change to reflect demand for directors with skills and experience in ESG and HCM matters.”
“Given the renewed focus on director pay from both proxy advisors and investors highlighted by the report, any changes to director pay – both to the structure and to the levels – will be acceptable as long as they are clearly explained and the rationale behind them is reasonable,” said Paul Hodgson, Senior Advisor at ESGAUGE Analytics. “While there has been a great deal of homogenization of director pay packages, neither investors, nor their advisors, are inherently against companies taking innovative approaches that can be seen to enhance long-term value and reduce risk.”
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 View our Covid-19 resource page: www.semlerbrossy.com/covid-19
About ESGAUGE Analytics
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
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