Over the past several years, one of the most consistent trends we have seen in the design of director compensation programs has been the decline in the prevalence of meeting fees. In this year’s NACD/Pearl Meyer Director Compensation Report, the prevalence of board meeting fees dipped below 25% of our survey sample, and the last time board meeting fees were a majority practice was in our 2011-2012 study. Most companies that have eliminated board meeting fees over recent years have replaced those fees with higher annual cash retainers or larger equity grants.
Meeting fees can help encourage meeting attendance and at least historically they were viewed as a fair way to differentiate directors based upon individual effort. At the same time, tracking and paying for meeting attendance adds complexity to program administration. In addition, with the expectation that all directors attend at least 75% of the meetings each year and where much of the work put in by nonemployee directors happens outside formal meetings, most companies have determined that meeting fees are no longer an appropriate differentiator.
No matter how comfortable companies may be with the rationale for doing away with meeting fees, however, concerns about their elimination still pop up from time to time, even for companies that have been without meeting fees for several years. How and to what extent you choose to respond with program changes will depend upon your specific situation. Here are some questions to ask:
- Is there an ongoing issue? Is your board concerned about compensation because the number of board or committee meetings is consistently above the peer group median? The first step here would be to revisit your benchmarking relative to market. Are you already paying at a level relative to peers that implies a larger meeting load or is an increase to board or committee retainers justified?
- Is this a one-time event? Is the concern driven by an additional workload attributable to a specific non-recurring situation? Perhaps you had a particularly challenging transaction or executive transition situation that required an abnormally large time commitment from your directors. Occasionally, boards will foresee the need for additional commitment and will establish a special committee for that purpose. In either case, a supplemental—often post-hoc—retainer may be provided to the affected directors. For guidance, you may be able to look to fees paid for services on standing committees of the board and evaluate how the work load for the special situation compares.
- Fear of the unexpected? The concern expressed may not spring from experience on your board but may be driven by a general sense that sometimes a given year turns out to have a greater work load than expected. If this is the case, and directors are not comfortable with a more discretionary post-hoc evaluation, some companies opt to establish conditional meeting fees. In these cases, the default program of retainers anticipates a certain meeting load during the year, and meeting fees kick in after the board has exceeded that threshold. As someone who has promoted the elimination of meeting fees, this approach feels to me like a step backward, but it may allow you to address concerns without going all the way back to the practice of paying regular meeting fees.
Whether you end up revising your pay positioning to address a chronically overworked board, add supplemental retainers for service above-and-beyond, or install a conditional meeting fee to address unforeseen developments, you should consider external optics. While still not subject to the same scrutiny as executive pay, director compensation can no longer fly entirely under the radar. So before finalizing any changes, think carefully about how you will discuss your rationale in the proxy and how individual director pay levels that result from these actions will stand up next to peers or within the latest proxy advisory firm evaluation model.