Retainers Show Director Pay is "Relatively Cheap"

When it comes to setting their own pay, directors have come down quite conservatively on the issue, even though many of them believe their pay levels no longer reflect the current risk and added responsibility of their jobs. In fact, most boards proceed very cautiously on this issue because they are increasingly concerned about any unspoken governance messages or unflattering optics that decisions to increase their pay may send.

“Director pay is a very sensitive topic because it is typically the board that is approving their own pay,” says Tim Dupuis, vice president at Pearl Meyer. Therefore, Dupuis says, members of boards at large companies say that their pay levels are adequate, and they generally seek external assistance when considering increases to director pay. Compensation experts agree that boards are unlikely to seek to make aggressive increases to their pay for fear it will raise eyebrows and bring unwanted scrutiny to the company.

The National Association of Corporate Directors has argued that the higher workloads and responsibilities of compensation committee chairs means that their pay should be similar to that of the head of the audit committee. However, Equilar data shows that since 2011 the average additional retainer level for compensation committee chairs has risen by approximately 16% to $21,008.

“I think we are done, at least in the near future, with [the] kind of significant increases to compensation committee pay…[and] for the foreseeable future I would expect compensation committee chair retainers to increase at a very modest rate, really similar to director pay itself,” Dupuis says.

While large companies generally pay their audit committee members more than directors on other committees, some companies have moved to eliminate the additional retainers for committee members who are not chairs, says Dupuis. At the same time, he says some boards are moving to make their annual retainer payments “all inclusive” compensation elements which are designed to compensate directors for both work at the board and committee levels. Dupuis believes this idea of streamlining director compensation packages is good from a communication perspective to shareholders. In his opinion, “the [simpler] the compensation package is, the easier it is to understand for shareholders and there is more of a clear line of sight of what board members are getting paid for.”

One way for boards to make sure that their pay practices remain competitive and send the right signals is by reviewing director pay annually. Dupuis says that, many times, companies receive extra scrutiny that is focused on pay because “a company maybe has not changed their director compensation program in a while, and therefore in order to stay competitive with the market, they are making very large increases in a given year, which obviously stands out to shareholders.”

Therefore, Dupuis recommends “staying on top of the market and making sure that you are staying competitive and making increases every one to two years rather than large jumps every five to six years.”