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More boards are capping the compensation directors can earn in a calendar year. New figures show that one quarter of Fortune 500 companies now have limits on the amount of equity that can be paid to board members, and most have adopted those measures in the past three years.
The continued threat of lawsuits challenging director compensation has propelled a crescendo of activity in director pay governance, according to a Pearl Meyer report published in early April by the National Association of Corporate Directors. As a result, caps on pay are slowly becoming a more standard practice. In addition, given that board pay continues to increase modestly each year, experts say that directors will continue to keep a close eye on trends in litigation and adapt pay practices as needed.
Jan Koors, managing director and head of Pearl Meyer’s Chicago office, says she doesn’t think huge numbers of boards will move to swiftly adopt limits on cash. It’s more likely, says Koors, that boards will take the step of granting shareholders a “say” on director pay, much like advisory say-on-pay votes for executive compensation.
Koors adds that boards have paid close attention to the lawsuits and have reviewed their own compensation plans and peer groups more critically to ensure that pay programs can withstand scrutiny. However, Koors says director compensation “typically isn’t going to be the smoking gun.” Usually, director pay comes up as an issue only when a company is criticized for poor performance or other governance issues, she says.
The NACD and Pearl Meyer 2015–2016 director compensation report finds that total direct compensation paid to directors on boards at the largest companies increased 3% from 2014 to 2015. Compensation at medium-size companies increased 1%, the study reports.
Because the study found a year-over-year increase in a year when many companies suffered losses,Koors says boards are acutely aware of the impression a director pay increase makes in years when company performance has lagged.
“Even if market data would say that a board is running behind the market, boards tend not to make increases in a year when company performance has been bad,” Koors says.