Recent shareholder lawsuits regarding excessive director pay have put a spotlight on how boards of directors determine their own pay. As a result, boards are faced with multiple competing pressures. On the one hand, boards want to set compensation at appropriate levels to attract and retain qualified directors. At the same time, they must balance the additional scrutiny and risk that come along with setting their own pay.
These concerns have prompted an increasing number of companies to adopt director pay limits in their shareholder-approved stock incentive plans, which set an upper limit on the amount of pay directors may receive as compensation for their membership on a board. ClearBridge Compensation Group recently conducted a study that found a growing trend among S&P 500 companies adopting shareholder-approved director pay limits. Key findings of our study include:
* Overall Prevalence: So far in 2016, based on proxy filings through June 14, 2016 ("2016 YTD" in exhibits), 63% of companies seeking shareholder approval of new or amended stock incentive plans included director pay limits, compared to only 38% of companies in 2015 and 38% in 2014. In addition, our research indicates major changes in the way companies are structuring director pay limits, including setting limits on total director compensation rather than only on the equity portion of the director compensation package.
* Trends by Industry: We looked at the breakdown of director pay limits by industry, as classified by the Global Industry Classification Standard (GICS), and found no significant correlation between industry and adoption rate of director pay limits (recognizing limited data for some industries), indicating this is a broader market trend and not confined to any particular industry. See Exhibit 1 for more detail.
* Type of Limit: Once a company decides to adopt a director pay limit, there are several different ways it can design these limits--most commonly an equity-only limit or a total compensation limit. While equity-only limits are the most common type of director pay limit (67% of companies in 2016), there has been a meaningful increase in the number of companies with total compensation limits overtime (33% of companies in 2016 vs. 2% in 2015 and 3% in 2014).
In addition, companies have shifted away from adopting fixed-share limits and moved towards adopting fixed-dollar limits, which is consistent with the gaining popularity of total compensation limits...