COVID-19 and New Priorities Affect Boards of Directors' Pay

When the first lockdowns of the COVID-19 pandemic began in March 2020, many businesses responded by modifying pay levels and incentive opportunities throughout their organizations. This wasn't limited to rank-and-file employees and management. Some companies also modified pay for the board of directors.

An April 2020 survey of 315 public and private companies and nonprofit organizations by consulting firm Pearl Meyer found that:

• 20% of respondents either rescinded a planned director pay increase or temporarily reduced director compensation;
• 14% were evaluating the effect of the pandemic and were considering changes to directors' pay; and
• About half (55%) continued with their pre-pandemic plans for directors' pay whether that included freezing board members' pay (38%) or increasing it (17%).

As they consider what they need from the board of directors now and in the future, some companies are rethinking how they pay board members. Meeting fees are one area of particular focus.

"Meeting fees are difficult to administer, especially for committees that have frequent meetings," said Ryan Hourihan, a principal with Pearl Meyer in Los Angeles.

Another change that could emerge from the pandemic is a move to compensate board members with a fixed number of shares of company stock, rather than a fixed dollar amount of stock shares. The reason: Stock price volatility can skew the ultimate value of equity grants and, potentially, exhaust a company's stock reserves, Hourihan said.

For example, stock grants of $100,000 made in March or April 2020 when stock prices plunged for a relatively short period meant that board members may have received far more shares than they would have just a few weeks earlier.

Alternatively, "companies could use a trailing 60- to 90-day share price average, or use the prior year stock performance, when [company stock] valuations had a more normal range, to set award levels," Hourihan suggested.

Companies often require a certain level of stock ownership during an outside director's tenure on the board, and Hourihan is seeing a trend toward requiring longer holding periods before directors can cash out company stock—such as extending the holding period for a certain number of years after a director retires from board service.

"Companies want boards to maintain an even longer-term perspective on strategy," he said.