Each year CAP analyzes non-employee director compensation programs among the 100 largest companies. We believe these companies provide insight into where the market will be going in terms of practices. This report is a summary of trends – for pay levels and pay practices – based on 2017 proxy filings.

CAP Findings

Board Compensation pay levels increased modestly

  • Total Fees. Increased 3 percent (median is $290K, versus $282K in prior year); board compensation has reached a steady state, and low single digit increases have been and are expected to continue to be the norm.
  • Retainers. Large companies rely on annual retainers (cash and equity) to compensate directors. Pay programs are typically simple and tend to rely less on meeting fees or committee member retainers.
  • Meeting Fees. Paid by only 11 percent of companies, consistent with prior year. In general, companies have moved to a fixed retainer pay structure, with a component in cash and a component in equity. We support this approach as it simplifies administration and eliminates the need to define “what counts as a meeting.” However, companies may want to consider having a mechanism for paying meeting fees if the number of meetings in a single year far exceeds the norm (“hybrid approach”). Five companies in our dataset used this approach to meeting fees, with the threshold ranging between 6 and 10 meetings.
  • Equity. Full-value awards (shares/units) are most common; only 7 percent of companies used stock options. 97 percent of companies denominated equity awards as a fixed value, versus a fixed number of shares, which is considered best practice as it manages the value awarded each year. Approximately two-thirds of equity awards vest within 1 year of grant (either immediately or cliff vest after 1 year).
  • Pay Mix. On average, 61 percent equity-based and 39 percent cash-based, consistent with prior year. Alignment with long-term shareholders is reinforced by delivering a majority of board compensation in equity.

Committee Member Compensation little/no change

  • Overall Prevalence. Half of companies paid committee-specific member fees for Audit Committee service and approximately one-third of companies paid member fees for Compensation or Nominating/Governance Committee service. The majority of companies rely on board-level compensation to recognize committee service, with the general expectation that all independent directors contribute to committee service needs1.
  • Total Fees. Of the companies that paid committee member compensation, the median was $17.8K.

Committee Chair Compensation higher Audit Chair premium

  • Overall Prevalence. More than 90 percent of companies provided additional compensation to committee Chairs, typically through an additional retainer and not meeting fees, to recognize additional time requirements, responsibilities, and reputational risk.
  • Fees. Median additional compensation for Audit Committee Chairs increased to $25K from $20K last year. Median additional compensation for Compensation and Nominating/Governance Committee Chairs was $20K and $15K, respectively, consistent with prior year.

Independent Board Leader Compensation higher Lead Director premiums

  • Non-Exec Chair. Additional compensation is provided by all companies with this role, $220K at median. As a multiple of total Board Compensation, total Board Chair pay is 1.83x a standard Board member, at median.
  • Lead Director. Median additional compensation increased to $35K, up from $30K in the prior year. Additional compensation is provided by nearly all companies with this role2. The differential in pay versus non-executive Chairs is in line with typical differences in responsibilities.

Pay Limits prevalence of limits continues to go up

  • Similar to last year, a majority of companies (55%) that amended or adopted an equity plan in 2017 – that did not already have a limit in place – implemented an award limit for director compensation.
  • In total, 47 percent of the largest 100 companies now have such limits, up from 39 percent in the prior year.
  • Limits range from $250K to $4.7 million, with the median limit being at $750K. Companies that denominate the limit in shares tend to have a higher dollar-equivalent limit, with a median of $1M. The median for the companies with value-based limits is $600K.
    Limit Range Prevalence
    <= $500,000 28%
    $500,001 – $1,000,000 55%
    $1,000,001 – $2,000,000 13%
    > $2,000,001 4%
  • The limits tend to be much higher than annual equity grants. Approximately 72% of limits are greater than 3x the annual equity grants.
    Limit Multiple Range Prevalence
    <= 3x annual equity 28%
    3.01x – 5x annual equity 36%
    5.01x – 7x annual equity 25%
    > 5x annual equity 11%
  • Limits typically apply to just equity-based compensation; however, some companies have applied the limits to both cash and equity-based compensation (i.e., total pay) and we anticipate the prevalence of this practice will increase further. Other companies exclude initial at-election equity awards, committee Chair pay, and/or additional pay for Board leadership roles from the limit.
  • The limits are largely due to advancement of litigation where the issue has been that directors approve their own annual compensation and are therefore deemed to be inherently conflicted.

Appendix

Range between 25th and 75th percentiles Median Value

Total Board Compensation ($000s)3

$250 $260 $274 $265 $282 $290 $293 $300 $319 $225 $275 $325 2014 2015 2016

Additional Compensation for Independent Board Leaders ($000s)

$325 $200 $200 $193 $225 $225 $220 $281 $288 $275 $125 $175 $225 $275 2014 2015 2016 $50 $25 $26 $29 $30 $30 $35 $40 $20 $30 $40 2014 2015 2016 Lead/Presiding Directors Non-Executive Chairs $50 $50

Total Company Cost for Board Service ($000s)

$2,525 $2,648 $2,674 $2,955 $3,160 $3,130 $3,290 $3,490 $3,669 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 2014 2015 2016

1 Audit, Compensation and/or Nominating and Governance committees.

2 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for the role.

3 Total Board Compensation reflects all cash and equity compensation for Board and committee service, excluding compensation for leadership roles such as committee Chair, Lead/Presiding Director, or non-executive Board Chair.

On a panel of leading executive compensation experts, Margaret Engel discusses some of the top executive compensation issues and trends including: the current public mistrust of executive compensation programs, the importance and the rigorous process of target goal setting, the challenges that many companies face with long-term performance awards, and the likely increase in the use of performance-based stock options in the future.

Each year CAP analyzes non-employee director compensation programs among the 100 largest companies. We believe these companies provide insight into where the market will be going in terms of practices. Below is a summary of trends – for pay levels and pay practices – based on 2016 proxy filings.

Key CAP Findings

Board Compensation. pay levels went up

  • Total Fees. Increased 6 percent (median is $282K, versus $265K in prior year), which is the biggest single year increase we have seen in more than 4 years, though still within historic norms
  • Retainers. Large companies rely on annual retainers (cash and equity) to compensate directors. Pay programs are typically simple and viewed more as an “advisory fee” than an “attendance fee.”
  • Meeting fees. Provided by only 11 percent of companies (versus 12 percent in prior year). In general, companies have moved to a fixed retainer pay structure, with a component in cash and a component in equity. We support this approach as it simplifies administration and the need to define “what counts as a meeting.” However, companies may want to consider having a mechanism for paying meeting fees if the number of meetings in a single year far exceeds the norm. For example, if the number of meetings is well above historic norms (e.g., 12 meetings/year), companies could consider paying meeting fees above a specified number of meetings. Three companies in our dataset use this approach to meeting fees.
  • Equity. Full-value awards (shares/units) are most common. Only 8 percent of companies use stock options with, surprisingly, only one of these companies being in the traditional technology sector. 97 percent of companies denominate equity awards (stock or options) as a fixed value, versus a fixed number of shares, which is considered best practice as it manages the value each year. Approximately two-thirds of equity awards vest within 1 year of grant (either immediately or cliff vest after 1 year). Nearly 60 percent of equity awards settle at vest, with the remainder settling at or post retirement.
  • Pay Mix. On average, 61 percent equity-based versus 39 percent cash-based. Alignment with long-term shareholders is reinforced by delivering a majority of compensation in equity.

Committee Member Compensation. little/no change

  • Overall Prevalence. Only 48% of companies paid committee-specific member fees, relying on board-level compensation to recognize committee service, with the general expectation being that all independent directors contribute to committee service needs1.
  • Total Fees. Of the companies that pay committee member compensation, the median is $16.8K.

Committee Chair Compensation. little/no change

  • Overall Prevalence. Approximately 90 percent of companies provide additional compensation to committee Chairs, typically through an additional retainer and not meeting fees, to recognize additional time requirements, responsibilities, and reputational risk1.
  • Fees. At median, $20K in additional compensation (vs. members) was provided to Audit and Compensation Committee Chairs, and $15K additional to Nominating/Governance Committee Chairs.

Independent Board Leader Compensation. little/no change

  • Non-Exec Chair. Additional compensation is provided by all companies with this role, $225K at median. As a multiple of total Board Compensation, total Board Chair pay is 1.9x a standard Board member, at median.
  • Lead Director. Additional compensation – $30K, at median – is provided by nearly all companies with this role3. The differential in pay versus non-executive Chairs is in line with typical differences in responsibilities. 75th percentile additional compensation was $50K, up from $40K last year and up from $35K two years ago.

Pay Limits. prevalence of limits went up

  • There were 17 companies in our data set that amended an equity plan this year; 2 of these companies already had a shareholder approved limit in place for director compensation. Among the remaining 15 companies, 9 of them (60 percent) implemented a new shareholder approved limit for director compensation.
  • In total, 39 percent of the largest 100 companies now have such limits, up from 27 percent in prior year.
  • Limits range from $250K to $3.6 million, and were $760K at median. Among companies that denominate the limit in shares, the median is $1.05M, while the median for the companies with value-based limits is $525K.
  • Limits typically apply to just equity-based compensation; however, some companies have applied the limits to both cash and equity-based compensation (i.e., total pay) and we anticipate the prevalence of this practice will increase further. Other companies exclude initial at-election equity awards, committee Chair pay, and/or additional pay for Board leadership roles from the limit.
  • The limits are largely due to advancement of litigation where the issue has been that directors approve their own annual compensation and are therefore inherently conflicted. Companies have a stronger legal defense – protecting them under the business judgement rule – by having “meaningful limits” approved by shareholders on the maximum award that could be granted to a director. The “business judgment rule” is judicial presumption that directors acted “on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” An action protected by the business judgment rule will not be second-guessed by the courts. There is a chance that the business judgement rule can be called into question without a meaningful limit. When the business judgment rule does not protect directors’ awards of compensation to themselves, the awards are subject to heightened scrutiny under the “entire fairness test” under which both the process and the amount of the compensation must be found to be entirely fair to the company.

Appendix

Total Board Compensation ($000s)

Equity Compensation

Equity Vehicle

2013

2014

2015

Full-Value Equity (Shares/Units)

95%

96%

92%

Stock Options

2%

1%

1%

Both

3%

3%

7%

Award Denomination

2013

2014

2015

Fixed Valued

88%

90%

92%

Fixed Shares

8%

6%

3%

Both

4%

4%

5%

Additional Compensation for Independent Board Leaders ($000s)

Lead/Presiding Directors

Non-Executive Chairs

Total Company Cost for Board Service ($000s)


1 Audit, Compensation and/or Nominating and Governance committees.

2 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for the role.

For many years, common practice in U.S. public companies has been to combine the roles of chief executive officer (“CEO”) and chairman of the board (“COB”), typically assigning the COB title and responsibilities to the sitting CEO. More recently, due to increased focus on governance and risk management, companies frequently separate the two roles. In some cases, companies will transition outgoing CEOs to the COB role. The duties of a separate COB can vary a great deal between companies, and expectations for the role as well as time served in the role will impact compensation. This review focuses primarily on the transition from CEO to COB and highlights compensation practices and factors influencing pay.

Prevalence of COB Role

Based on a review of companies ranging from $1 billion to $20 billion in revenue, we found that approximately 10% of companies operate with an Executive Chair and 45% have a Non-Executive Chair. Among the 10% with an Executive Chair, approximately one-half are founders (or have significant ownership in the company, i.e., more than 15% of shares outstanding), and the majority were former CEOs. This fact pattern is a very rational and effective progression, providing a smooth transition and advantages to the new CEO, shareholders, and the company’s overall operating efficiency. In the case of Non-Executive chairs, it is more common for the role to be filled from outside the company or by a member of the board of directors.

The need for and role of a separate COB evolves for different reasons. The responsibilities and time commitment of this role can vary greatly by company. Many founders step out of the CEO role to reduce their time commitment, but continue on as COB for many years so they can oversee the results of the company and weigh in on the company’s performance and strategy. Alternatively, the board may ask an exiting CEO to stay on for a year to help with the transition to a new CEO and provide continuity to the organization. It may be that an exiting CEO stays on to oversee a major initiative that needs dedicated oversight. The role could evolve as a result of a spin-off from an existing public entity. While difficult to generalize, there are certain duties that may be a part of any separate COB role such as executive coaching and mentoring, succession planning, and long-term strategy development. The COB is most often an advisory role, with no oversight of daily operations. These responsibilities dictate the planned timing of the role itself, be it short or long-term service in the position.

Overall Pay Levels and Pay Practices for Chairman Role

Pay Levels

While there is variation in pay practices that we discuss below, our research shows that the following pay practices, expressed as a relationship between compensation of the Executive COB and CEO roles.

Pay Summary Stats

Scenario (at Median)

Base

Bonus

LTI

TDC

CEO Transition to Chairman

Chair Role Pay as a Percentage of Pay while Serving as CEO

~100%

~100%

~40%

~50%

Chair Role Pay as a % of New CEO Pay

95 – 105%

85 – 95%

55 – 65%

65 – 75%

Chairman that is founder/significant shareholder

Chair Role Pay as a % Current CEO Pay

~90%

~85%

~25%

~60

The background of the incumbent assuming the COB role may create some variations to pay levels and practices. For example, Executive Chairs that are founders/significant owners of their company make about 35% more, at median, than non-founder Executive COBs.

Pay Practices

We frequently see the following pay practices:

  • Since many COBs have transitioned from the CEO role and have accumulated a large equity stake, or are founders with significant equity ownership, equity compensation tends to account for a smaller portion of the compensation package when compared to current CEOs.
  • More companies grant stock options or restricted stock with time-based vesting, instead of granting long-term performance-based compensation. We believe time-based vesting is appropriate because the Executive COB role is often more advisory in nature, rather than contributing to operational decisions that impact long-term financial performance. There may also be uncertainty associated with the length of the role.
  • Equity awards may include a one-time grant or annual grants, depending on the estimated timeframe of the role. Vesting of equity awards is generally in installments over 3 or 4 years or vesting that aligns with the time in the role or the time that the Chair might remain an employee of the company.
  • Executive COBs most often participate in the company’s bonus program, using the same corporate performance metrics that apply to the CEO. Individualized metrics are rarely used.

Transition of an Active CEO to an Executive COB Role

When a successful, long-tenured Chairman and CEO begins to plan for retirement, companies may strategically approach the succession process over time. Boards may keep the retiring CEO on as an employee of the company, as Executive COB, for a period of time. This period allows for a smooth succession of responsibilities. It may also mitigate uncertainty about new leadership. It is possible that a Lead Director, outside Board member, or other executive may fill the role of Executive (or Non-Executive) Chair, yet most often the role is filled by a retiring CEO.

Executive Chair Scenarios and Fact Patterns Influencing Compensation:

While pay practices vary, there are considerations to be made as it relates to compensation based on the expected timing that the Chairman role will exist or that the individual incumbent will be in the role. There are some patterns in the compensation structure if the role is shorter or longer- term.

Fact Pattern

Practice

Short Time Period of COB Role (1-year or less)

  • Frequently, no adjustment is made to salary or annual incentive
  • If annual equity grant date is before the transition, vesting practices are mixed (some companies allow equity to vest according to plan, others use enhanced vesting)
  • If annual equity grant date is after the transition, companies tend to reduce (or eliminate) the equity grant

Longer Time Period of COB Role (more than 1-year)

  • Salary and annual incentive opportunity may be reduced
  • Equity may be decreased to 40% of what it was while serving as CEO

Executive COB whot is a Founder/Significant Shareholder

  • Generally paid approximately 35% more than Executive Chairman that are not founders/significant shareholders
  • Majority of pay is in the form of cash

Consultant or Special / Senior Advisor

  • At some companies, the CEO becomes a Consultant or Advisor
  • Typically receive salary, or provided special cash stipend or 1x LTI award depending on role and duration of assignment

Non-Executive COB – Executive COB, outside Director or New Hire transition

  • Receive normal Board cash and equity plus additional (premium) compensation for Chair duties in cash or equity. Amount depends on nature of role, hours worked, duration of role, and is often a multiple of the regular director cash or equity retainer

Executive COB Role – Short Time Period (1 year or less)

When a CEO transitions to an Executive COB role, planned for a shorter period of time, the CEO often changes roles near the end of the fiscal year or near the annual shareholder meeting. There tends to be minimal adjustment to the base salary or annual incentive target for this period in the role. If the annual equity grant has not been made for the year, companies tend to reduce the value of the equity award and the form of the award may be modified. Companies differ on the treatment of outstanding equity awards. There are two potential scenarios:

  1. The company may allow outstanding equity to vest normally, according to the plan (retirement vesting if the executive is eligible), or
  2. The company provides some type of “enhanced-vesting” for the time that the retiring executive serves as chairman

If the transition is made after the annual equity grant, companies tend not to decrease the equity grant amount in the year of the change. Companies should consider which approach is most appropriate given the vesting period that remains, the type of outstanding award (e.g., 10-year option, 3-year performance award), the cumulative value that the COB may receive due to any enhancement, and potential shareholder reaction.

Executive COB Role – Longer Time Period (Greater than 1 year)

When the Executive COB role is expected to be greater than one year, adjustments are made to the level of pay and the forms of compensation used. Overall, base salary and annual incentive targets may be 85% to 95% of the current CEO’s pay levels. Equity may be decreased to 40% of what it was while serving as CEO, resulting in total direct compensation that is 65% and 75% of the compensation of the current CEO.

Equity awards tend to have time based vesting and are commonly not tied to longer term company performance. Vesting schedules may be modified, if necessary, to align with the expected timeframe of the Executive COB’s service. Companies often make annual equity awards, yet those that have clarity around expected timeframes may grant one-time awards intended to cover the entire time in the role.

A related benefit for CEOs in this situation may be the continued vesting of large outstanding equity grants that were received while serving as CEO. When award vesting follows the normal course, shareholders and proxy advisory services firms may view this more favorably than enhanced vesting arrangements that may be provided when the CEO retires sooner.

Non-Executive COB Role

Non-Executive COBs have a smaller time commitment. They tend not to have a specific strategic or operational oversight role, yet they do lead the board of directors. Non-Executive COBs often serve as the primary liaison between the board and the CEO and provide additional leadership and guidance. Most commonly, Non-Executive COBs participate in the regular compensation program for the company’s outside directors and receive a premium. When the premium is added to the regular board compensation, median Non-Executive COB compensation is approximately 1.6x – 1.8x the compensation paid to regular outside directors.

Conclusion

Pay for Executive COBs varies a great deal and depends on a company’s particular situation. However, when specific situations are examined closely, patterns do emerge. For example, our research indicates that a COB who is a founder or significant shareholder tends to get paid more than COBs who are not founders or significant shareholders. We also found that exiting CEOs who transition into a COB role for a short period of time may frequently receive preferable equity vesting treatment. General pay norms will help provide direction, but the responsibilities, time commitment, incumbent’s tenure with the company, ownership status, etc. should all be factored into the compensation program provided.

Case Studies

Key CAP Findings

Board Compensation. little/no change

  • Total Fees. Generally flat year-over-year (median is $265K, versus $260K in prior year).
  • Retainers. Large companies rely on annual retainers (cash and equity) to compensate directors. Pay programs are typically simple and viewed more as an “advisory fee” than an “attendance fee.”
  • Meeting fees. Provided by only 12 percent of companies (versus 15 percent in prior year). In general, companies have moved to a fixed retainer pay structure, with a component in cash and a component in equity.
  • Equity. Full-value awards (shares/units) are most common and only four percent of companies use stock options. 94 percent of companies denominate equity awards (stock or options) as a fixed value, versus a fixed number of shares which is considered best practice as it manages the value each year.
  • Pay Mix. On average, 58 percent equity-based vs. 42 percent cash-based. Alignment with long-term shareholders is reinforced by delivering a majority of compensation in equity.

Committee Member Compensation. little/no change

  • Overall Prevalence. 45 percent of companies paid committee-specific member fees1.
  • Total Fees. Among companies paying committee member fees, the median is $15.5K.

Committee Chair Compensation. little/no change

  • Overall Prevalence. Approximately 90 percent of companies provide additional compensation to committee Chairs, typically through an additional retainer, to recognize additional time requirements, responsibilities, and reputational risk.
  • Fees. At median, $20K in additional compensation (vs. members) was provided to Audit and Compensation Committee Chairs, and $15K additional to Nominating/Governance Committee Chairs.

Independent Board Leader Compensation. little/no change

  • Non-Exec Chair. Additional compensation is provided by all companies with this role, $225K at median. As a multiple of total Board Compensation, total Board Chair pay is 1.84x a standard Board member, at median.
  • Lead Director. Additional compensation – $30K, at median – is provided by nearly all companies with this role2. The differential in pay versus non-executive Chairs is in line with typical differences in responsibilities. Median additional compensation was flat – $25K – for the five years prior to 2013 (median in 2013 was $28K).

Perquisites. little/no change

  • Prevalence. Overall, limited use. One-third of companies provide gift matching/charitable contribution.

Pay Limits. little/no change

  • 21 percent of companies that amended or adopted new equity plans in 2015 implemented specific limits for director compensation. In total, 27 percent of Fortune 100 companies now have such limits.

CAP Perspective

Board Pay Levels and Structure

We believe director compensation has leveled off – for the time being – and expect to see only modest increases in the next year.

In terms of pay program, fixed retainer structures are now the norm and meeting fees – already minority practice – continue to decline in prevalence as director compensation is now often viewed more as an “advisory fee” than an “attendance fee.”

Director Pay Limits

A number of companies have implemented limits on director compensation. The limits are largely due to advancement of litigation in Delaware court where the issue has been that directors approve their own annual compensation, and the shareholder approved long-term incentive plan did not provide “meaningful limits” on the maximum award that could be granted to a director.

Currently, 27 percent of companies studied (vs. 23 percent in prior year) have included limits for non-employee director compensation in their shareholder approved long-term incentive plan. These limits range from $250K to $3.5 million, $770K at median (vs. $800K in prior year), and typically apply to just equity-based compensation. Some companies have applied the limits to both cash and equity-based compensation, while others have excluded initial at-election equity awards, committee Chair pay, and/or additional pay for Board leadership roles from the limit.

We expect director pay limits to become majority practice within the next few years.

Lead Director Compensation

The Lead Director role has evolved, especially in companies where the CEO and Chairman roles are combined. For example, Boards are engaging in more outreach and meeting with shareholders to talk about governance practices, CEO succession and executive compensation, among other issues, and many investors want to hear from the Lead Director. Nearly all companies studied now provide additional compensation for the Lead Director role.3 However, additional compensation provided for the Lead Director role continues to be quite different than the non-executive Chair role. At median, an additional $30K was provided for the Lead Director role, versus $225K for the non-executive Chair role. The differential in pay is generally in line with typical differences in responsibilities.

Providing additional compensation to the Lead Director sends a signal to investors regarding expectations for the role, including time commitment, responsibilities, and authority. Many times, companies have been able to settle (or argue against) shareholder proposals to split the CEO and Chairman roles by instituting (or emphasizing) a strong Lead Director role and delineating the specific responsibilities of the position. Boards can also reassure investors concerned about overall governance practices at a company by increasing Lead Director responsibilities.

Best in Class Director Compensation Process & Practices

Best in Class

PROCESS

  • Establish pay levels and structure with consideration given to market data, trends and outlook
  • Define target market positioning for total pay
  • Generally, target should align with the executive compensation philosophy
  • “Market” should reflect the peer group used for executive compensation benchmarking and/or size-appropriate general industry data
  • Disclose the philosophy and rationale for the program
  • Use compensation as a tool to reinforce alignment of the interests of non-employee directors and long-term shareholders

Best in Class

PRACTICES

  • Align pay levels with organization size and complexity, considering organization-specific time commitments and responsibilities
  • Review director pay programs focusing on aggregate pay (Total Board Compensation), with consideration given to the ratio of cash compensation to equity compensation and additional pay for Board leadership roles
  • The pay program should be viewed as a “advisory fee” vs. an “attendance fee”
  • Structure pay so that equity represents at least half of the total
  • Establish meaningful equity ownership requirements
  • Eliminate benefit and/or perquisite programs unless a strong business case exists

Appendix

4


1 Audit, Compensation and/or Nominating and Governance committee members.

2 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for that role.

3 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for that role

4 Total Board Compensation reflects all cash and equity compensation for Board and committee service, excluding compensation for leadership roles such as committee Chair, Lead/Presiding Director, or non-executive Board Chair.

Key CAP Findings

Board Compensation. little/no change

  • Total Fees. At median, flat from 2012 to 2013 ($257K vs. $260K)2. Only increased four percent since 2011.
  • Retainers. Pay programs have been simplified, now viewed more as an “advisory fee” than an “attendance fee.” In general, companies have moved to a fixed retainer pay structure, with a component in cash and a component in equity.
  • Meeting fees. Provided by only 15 percent of companies, down slightly from 2012.
  • Equity. Full-value awards (shares/units) are most common. Only five percent of companies use stock options. 92 percent of companies denominate equity awards (stock or options) as a fixed value, versus a fixed number of shares.
  • Pay Mix. On average, 56% equity-based vs. 44% cash-based (consistent for past three years). Alignment with long-term shareholders is reinforced by delivering a majority of compensation in equity.

Committee Member Compensation. little/no change

  • Less than half of companies paid committee-specific member fees3.
  • At median, committee member compensation is $04. There has been a trend away from committee member fees; value typically rolled into Board cash or equity retainers.

Committee Chair Compensation. limited, but notable change

  • Nearly all companies provided additional compensation to committee Chairs, versus committee members, typically through an additional retainer. The additional compensation recognizes additional time requirements, responsibilities, and reputational risk.
  • At median, $20K in additional compensation (vs. members) was provided to Audit and Compensation Committee Chairs, and $15K to Nominating/Governance Chairs. This is the first year the premium, at median, provided to Compensation Chairs equaled that provided to Audit Chairs.

Independent Board Leader Compensation.
limited, but notable change

  • Non-Exec Chair. Additional compensation is provided by all companies with this role, $220K at median.
  • Lead Director. Additional compensation is provided by nearly all companies with this role5, $28K at median. The differential in pay versus non-executive Chairs is in line with typical differences in responsibilities. Additional compensation was steady, at median, at $25K for the five years prior to 2013.

Perquisites. little/no change

  • Overall, limited practice. One-third of companies continue to provide gift matching/charitable contribution.

Pay Limits. NEW to study

  • Due mainly to advancement of litigation in Delaware court related to director compensation, several companies (23%) have adopted shareholder approved director compensation limits ($800K, at median). The limit most often applies only to equity-based compensation.

CAP Perspective

Board Pay Levels and Structure

We have hit somewhat of a “steady state” in terms of director pay levels. Over the next few years, we expect modest pay level changes; i.e., low-to-mid single-digit annual increases in Total Board Compensation6. among the broader data set. Individual companies typically make pay level changes every two-to-three years; when they do, the changes tend to be larger than those observed annually within the full data set.

In terms of practices, pay programs have continued a trend towards simplification, as director compensation has become viewed more as an “advisory fee” than an “attendance fee.” Companies have moved to fixed retainer pay structures, with a component in cash and a component in equity, as opposed to use of per-meeting fees.

Director Pay Limits

A number of companies have recently placed limits on director compensation. The limits are largely due to advancement of litigation in Delaware court. In these cases the issue has been that directors approve their own annual compensation, and the shareholder approved long-term incentive plan did not provide “meaningful limits” on the maximum award that could be granted to a director.

When seeking shareholder approval for amendment to an omnibus long-term incentive plan or director compensation plan, 23 percent of companies studied have included value- or share-based limits (13% and 10%, respectively) for non-employee director compensation. These limits range from $250K to $2 million, $800K at median, and typically apply to just equity-based compensation. Some companies have applied the limits to both cash and equity-based compensation while others have excluded initial at-election equity awards, committee Chair pay, and/or additional pay for Board leadership roles from the limit.

We expect prevalence of director pay limits to increase, becoming majority practice within the next three to four years.

Lead Director Compensation

The Lead Director role has evolved, oftentimes a more active role than three to five years ago. As a result, companies are looking at time commitment and responsibilities, and structuring compensation to appropriately reflect the current role and expectations. Boards are engaging in more outreach and meeting with shareholders to talk about governance practices, CEO succession and executive compensation, among other issues, and many investors want to hear from the Lead Director.

Prevalence of providing additional compensation for the Lead Director role has increased over the past five years. Currently, additional compensation is provided by nearly all companies studied with a Lead Director7.

Despite the increased activity of Lead Directors, additional compensation provided for the role continues to be quite different than non-executive Chairs. At median, $28K was provided for the Lead Director role, versus $220K for the non-executive Chair role. In terms of additional compensation, for Lead Directors the pay ranges from $25K to $35K and for non-executive Chairs it ranges from $143 to $260 at 25th and 75th percentiles, respectively. The differential in pay is in line with typical differences in responsibilities. Previously, additional compensation for Lead Directors was steady, at median, at $25K for the last five years. Still, differences exist, somewhat, in role/responsibilities across companies which can impact the level of premium compensation provided for the Lead director role.

Making the decision to provide additional compensation to the Lead Director can send a signal to investors regarding expectations for the role, including time commitment, responsibilities, and authority. Many times, companies have been able to settle (or argue against) shareholder proposals to split the CEO and Chairman roles by instituting (or emphasizing) a strong Lead Director and delineating the specific responsibilities of the position. Boards can also reassure investors concerned about overall governance practices at a company by increasing the Lead Director role/responsibilities. Stock Ownership Guidelines Based on our research, 83% of companies have formal stock ownership requirements. Approximately half of companies studied required directors to defer recognition of equity pay until retirement. The median value of required stock ownership level was $450K.

Detailed Findings

Total Board Compensation

At median, 2013 non-employee director compensation was $260K, generally consistent with 2012.

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Pay Mix

The mix of cash and equity paid to outside directors has remained the same for the last 3 years. On average, 56 percent of compensation was equity-based, and 44 percent was cash-based.

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Equity Compensation

Full-value equity awards (stock/units) are the most common form of stock-based compensation. Only five percent of companies used stock options in 2013.

Vehicle

2013

2012

2011

Full-Value Equity

95%

93%

93%

Stock Options

2%

2%

5%

Both

3%

5%

2%

Equity awards denominated as a fixed value, as opposed to awards based on a fixed number of shares, continue to increase in prevalence. In 2013, 92 percent of companies denominated equity awards – stock and/or options – based on a fixed value.

Award Type

2013

2012

2011

Fixed Value

88%

82%

84%

FIXED Shares

8%

11%

15%

Both

4%

7%

1%

Committee Compensation

In 2013, just under half of companies studied paid fees specific to committee members (Audit – 48%, Compensation – 35%, and Nominating/Governance – 32%). Given this, at median, committee member compensation was $0. Among companies that do pay separate fees for committee member service, median compensation during 2013 was $15K.

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During 2013, additional compensation (premium vs. member) was provided to 96 percent of Audit Committee Chairs, 90% of Compensation Committee Chairs, and 89% of Nominating/Governance Committee Chairs.

Unlike prior years, during 2013 the additional compensation provided to Audit Committee Chairs, at median, was equal to that provided to Compensation Committee Chairs ($20K). The premium provided to Chairs of Nominating/Governance Committees, at median, was lower ($15K).

Lead/Presiding Directors and Non-Executive Board Chairs

Additional compensation is typically provided to Lead/Presiding Directors and non-Executive Board Chairs.

During 2013, median additional pay provided to Lead Directors and non-executive Chairs increased to $28K and $220K, respectively. Previously, median compensation provided to Lead Directors had been flat for five years.

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Best in Class Director Compensation Process & Practices

Best in Class

Director Compensation

PROCESS

  • Establish pay levels and structure with consideration given to market data, trends and outlook
  • Define target market positioning for total pay
  • Generally, target should align with the executive compensation philosophy
  • “Market” should reflect the peer group used for executive compensation benchmarking and/or size-appropriate general industry data
  • Disclose the philosophy and rationale for the program
  • Use compensation as a tool to reinforce alignment of the interests of non-employee directors and long-term shareholders

Best in Class

Director Compensation

PRACTICES

  • Align pay levels with organization size and complexity, considering organization-specific time commitments and responsibilities
  • Review director pay programs focusing on aggregate pay (Total Board Compensation), with consideration given to the ratio of cash compensation to equity compensation and additional pay for Board leadership roles
  • The pay program should be viewed as a “advisory fee” vs. an “attendance fee”
  • Structure pay so that equity represents at least half of the total
  • Establish meaningful equity ownership requirements
  • Eliminate benefit and/or perquisite programs unless a strong business case exists
  • 1 Analysis excludes privately held companies.
  • 2 Total Board Compensation reflects all cash and equity compensation for Board and committee service, excluding compensation for leadership roles such as committee Chair, Lead/Presiding Director, or non-executive Board Chair.
  • 3 Audit, Compensation and/or Nominating and Governance committee members.
  • 4 Reflects all compensation for committee member service (excludes additional fees for leadership roles), across all Board committees.
  • 5 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives additional compensation for that role.
  • 6 Total Board Compensation reflects all cash and equity compensation for Board and committee service, excluding compensation for leadership roles such as committee Chair, Lead/Presiding Director, or non-executive Board Chair.
  • 7 Excludes controlled companies. Also excludes instances where Lead Director role is assumed by Chair of Nominating and Governance Committee, who receives compensation for the role.

Notable Findings

Total Board Compensation

At median, non-employee director compensation increased three percent in 2012, to $257K, after a six percent increase in 2011 and a flat period in 2010. Year-over-year, median Total Board Compensation increased from $250,000 to $257,0003.

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In line with emerging practices, large companies are relying on annual retainers to compensate outside directors. Use of Board meeting fees remained a minority practice in 2012, with only 18 percent of companies paying board meeting fees. This is similar to 2011 and 2010, where 19 percent and 23 percent of companies provided meeting fees, respectively.

Pay Mix

The mix of cash and equity paid to outside directors was generally consistent between 2010 and 2012. On average, the majority of compensation delivered to directors continues to be in the form of equity.

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Equity Compensation

Full-value share equity, including restricted stock units, restricted stock, deferred stock units and outright awards of common stock, continues to be by far the most common form of equity delivered to non-employee directors, with only seven percent of companies using stock options as part of the director compensation package.

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In the recent years, equity awards denominated as a fixed value increased in prevalence, as opposed to awards based on a fixed number of shares.

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CAP Perspective: Over the next few years, we expect the following changes in director compensation to take place: 1) low-to-mid single-digit annual increases in Total Board Compensation; 2) more companies moving to fixed retainer pay structures with a component in cash and a component in equity as opposed to paying meeting fees; and 3) a continued emphasis on full-value equity awards. Delivering a majority of compensation in the form of equity coupled with stock ownership / retention requirements creates strong alignment with long-term shareholders and is considered a best practice.

Committee Compensation

Companies have de-emphasized committee member compensation, instead focusing on overall Board compensation. Our research found that just over 50 percent of companies pay no committee-specific fees to members of any of the three major committees4, similar to 2011 and up from just over one-third in 2010. Since a slight majority of companies do not pay separate fees for committee service, at median committee member compensation is now $05. Among companies that do pay separate fees for committee service, median committee member compensation is $16K.

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From 2011 to 2012, median additional compensation for committee Chairs remained flat for the Audit and Compensation committees, and increased +17 percent for the Nominating / Governance Committee. Relatively flat year-over-year changes may be associated with a better understanding of the time requirement of the leadership role versus that of a committee member.

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CAP Perspective: We expect the trend away from committee member fees to continue, at a slow-to-moderate pace, with the value being rolled into Board cash or equity retainers.

Serving as a committee Chair is generally viewed as a Board leadership role, with additional time requirements, responsibilities, and reputational risk; as a result, additional compensation is often provided for the role.

Near-term, we expect a differential to continue between the additional compensation paid to the Chair of the three major board committees.

Lead/Presiding Directors and Non-Executive Chairmen of the Board

During 2012, the prevalence of providing additional compensation for Lead/Presiding Directors and non-Executive Board Chairs increased to nearly 80 percent, up from approximately 70 percent in 2011 and 65 percent in 2010. In terms of additional compensation for the role, median pay was unchanged at $25,000 in from 2010 to 2012 for Lead/Presiding Directors, and increased slightly for non-Executive Chairs.

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CAP Perspective: While not all non-executive Board leaders receive additional pay for the role, prevalence of additional compensation for these roles is expected to continue to increase over time. The differential in pay between Lead/Presiding directors and non-Executive Chairs is in line with the typical responsibilities of each position.

Conclusion

With the increased scrutiny Boards are under and the time commitment required, in the last five years we have seen a relatively significant increase in non-employee director compensation, though at this point we have hit more of a “steady state” and expect more modest pay level changes going forward. In terms of practices, pay programs have continued a trend towards simplification, as director compensation has become viewed more as an “advisory fee” than an “attendance fee.”

It continues to be important to comprehensively evaluate director pay programs on a regular basis or risk falling behind the curve in terms of desired market positioning and best in class program design. When programs are evaluated, the process and practices listed below should be considered.

Best in Class Director Compensation

PROCESS

  • Establish director pay levels and structure in an informed, deliberate and objective way, with consideration given to market data, trends and outlook
  • Define target market positioning for total pay
    • Generally, the target should align with the executive compensation philosophy
    • “Market” should reflect the peer group used for executive compensation benchmarking and/or size-appropriate general industry data
  • Use compensation as a tool to align the interests of non-employee directors and long-term shareholders
  • Disclose the director compensation philosophy and rationale for the program

Best in Class Director Compensation

PRACTICES

  • Align pay levels with an organization’s size and complexity; in turn, provide appropriate pay for time and responsibilities
  • Review director pay programs focusing on aggregate pay (Total Board Compensation), with consideration given to the ratio of cash compensation to equity compensation and additional pay for Board leadership roles
  • Structure pay so that equity represents at least half of the total
  • The pay program should be viewed as an “advisory fee” vs. an “attendance fee”
  • Establish meaningful equity ownership requirements that must be achieved within 5 years
  • Eliminate benefit / perquisite programs unless there is a strong business case for maintaining them

 

1 Analysis includes public Fortune 100 companies (excludes privately held companies).

2 Research assistance for this report was provided by Alex Stahl, Kevin Scott, Armando Rivera and Ryan Colucci.

3 Total Board Compensation reflects all cash and equity compensation for Board and committee service, excluding compensation for additional leadership roles such as committee Chairman, Lead/Presiding director, or non-executive Chairman of the Board.

4 Audit, Compensation and Nominating / Governance committees.

5 Reflects all compensation for committee member service (excludes additional fees for leadership roles), across all Board committees.