Director Tenure Decreases, Perquisites See Slight Increase in New Compensation Report
Compensation of nonemployee directors is a key component of governance in all corporations. A thoughtful compensation plan assists in aligning the interests of shareholders and directors, as well as providing value to directors for value received.
The newly released 2020–2021 Director Compensation Report, produced in collaboration with Pearl Meyer, provides a comprehensive perspective on director-pay practices across a wide range of industries and company sizes, including data from the largest 200 companies in the S&P 500. Key findings from the report are featured below.
Board Composition and Structure
While median director age has remained largely unchanged in recent years, median director tenure has decreased from the prior year across most size categories—from 7.0 to 6.5 years in the Micro category, from 7.8 to 7.1 in the Medium category, from 7.4 to 7.2 in the Large category, and from 6.8 to 6.3 in the Top 200. These company size categories are defined by revenue and explained in more detail in the full report.
Boards continue to move toward increased gender diversity, as the aggregate percentage of companies with female directors increased across all size categories. In 2020, 92 percent of companies had at least one female board member, compared to only 78 percent as recently as 2015. Thirty-five percent of all companies have three or more female directors compared to only 17 percent in 2015.
More than two-thirds of companies continue to implement one-year terms for directors, as companies feel more external pressure from investors and shareholder advisory groups to have directors on annual terms.
Equity Grant Practices
In accordance with market best practices, equity should comprise a significant portion of director compensation. Firms within each category size adhere to these practices, with 93 percent of all firms providing board members with equity grants. We continue to observe an increase in company size correlating with an increase in the prevalence of equity grants, with 87 percent of Micro companies providing them while 98 percent of Top 200 companies provide them. Full-value shares continue to be much more prevalent than stock options, with 89 percent of all companies using them compared to only 10 percent using stock options.
The median cash versus equity pay for all size categories remains at least 50 percent equity—an NACD leading practice. This trend has persisted for many years among Medium, Large, and Top 200 firms, but Micro and Small companies recently have followed suit to further align director and shareholder interests.
Equity Award Holding Requirements
The multiyear trend of moving annual equity awards from a fixed-shares approach to a fixed-value approach continued in 2020 across all size categories. In 2020, the prevalence of fixed-value awards increased slightly across all size categories with the exception of Micro organizations, which saw a decrease in prevalence by 3 percent.
Premium Pay for Nonexecutive Board Leadership
Premium compensation among nonexecutive board chairs continues to be more prevalent than for other forms of board leadership (e.g., lead director, presiding director). Eighty-five percent of firms with nonexecutive board chairs paid a premium. Premium compensation for other forms of board-leadership service continues to be less common, with 40 percent of companies reporting its usage as compared to 41 percent in last year’s study.
Stock Ownership Guidelines
Overall, 81 percent of companies maintain share ownership guidelines. Of these organizations, 71 percent express their guidelines as a multiple of the board’s annual cash retainer.
Holding requirements prevent directors from selling shares or options for a designated period. The prevalence of these requirements increased across all size categories, with Small companies leading with an increase of 7 percent over the prior year. Prevalence of holding requirements grew from 31 percent to 35 percent across all firms.
Perquisites and Benefits
Despite the scrutiny surrounding them, perquisites for directors saw a 1 percent increase from last year. That said, only 17 percent of all companies provided perquisites to directors. Slightly more than half of the Top 200 companies offered director perquisites in 2019 (an increase of 2 percent over the preceding two-year period). For each of the Micro, Small, and Medium size categories, the prevalence of perquisites is at or below 11 percent, and decreases with company size. Large companies saw the largest change: a decrease of 3 percent from 2019, reflecting the continued trend of decreased reliance on board perquisites. Charitable-gift-matching programs (often in the form of a defined maximum match of $5,000 to $10,000) remain the most-common form of perquisite, due to the limited personal benefit received by directors. This holds true across all size categories.
For more on the latest compensation trends, read the full 2020–2021 Director Compensation Report.
This content was written by a team of NACD editors.