Director compensation: current trends and future expectations: pay for board service is seeing some important shifts--in who sets it, how it is set, and, following two years of little growth, increases in basic fees along with the setting of 'leadership premiums'.

• Author: Glass, Kimberly A.
• Position: DIRECTOR COMPENSATION

BOARDS OF DIRECTORS are being put under increasing scrutiny by shareholders, stock exchanges, and even the U.S. Congress. At the same time, the amounts paid to directors have been relatively unchanged during 2008 and 2009. However, recent trends indicate that boards are making substantial changes to director pay programs in 2010.

There are some interesting trends in director compensation, which are as follows:

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* Director pay is continuing to be simplified as companies continue to eliminate all meeting fees and even committee member retainers and make up for this with a corresponding increase in board retainers (partly in cash and partly in stock). However, additional compensation is being paid for serving as a committee chair or the lead director ("leadership premium").

* The role of the lead director is emerging (in some cases replacing the role of presiding director) with corresponding increases in compensation for that role.

* Stock ownership guidelines (typically as a multiple of the annual cash retainer) continue to grow in use along with the related increased use of deferred equity, which must be held until the end of board service.

* Corporate governance committees are assuming the predominant role in advising boards on director pay with the help of independent compensation consultants.

* Companies are beginning to increase director pay in 2010 after two years of little growth.

Evolutionary moves

Director compensation has evolved from the early 1900s when directors were representatives from major shareholders (or even the major shareholder) and were only paid travel expenses (and perhaps a meal was provided) to the modern structure of director compensation, where the director typically is not affiliated with a major shareholder and substantial compensation is paid, in addition to travel expenses and meals (that has not changed).

In the mid-1990s, it was common for director compensation to be set by shareholders (at least the equity portion of the award). In fact, stock plans would contain fixed share amounts that could be awarded to directors each year. This fixed director pay was a result of interpretation that directors could not set their own pay--only shareholders could do so. At the same time, it was common for directors to receive annual stock awards as a fixed number of shares. This has all changed as directors now set their own pay as part of the corporate governance process, and most annual grants are now expressed in value (and not shares), which has stabilized director pay levels.

We recommend a review of director pay every two or three years. Recent filings show that approximately 25% of companies made changes to their director compensation programs in 2010.

Unique shift

Our research also shows an...