A new basis for director pay: companies should consider basing director compensation on fundamental principles of board service.

• Author: Delves, Donald
• Position: DIRECTOR COMPENSATION

OVER THE PAST DECADE, the job of corporate directors has become increasingly demanding. Providing ultimate oversight for companies involves significantly more time, attention and reflection. Board duties have expanded far beyond merely preparing for and attending meetings. Board composition and culture has also changed as baby boomers have assumed more director positions. Boards are more diverse. Directors tend to be more independent, ask tougher questions and are more comfortable with productive debate and disagreement. They confront an increasing array of regulatory and legal challenges without losing sight of corporate purpose, mission, and strategies.

In this new era of board service, companies should take a fresh look at director compensation to ensure that it reflects dramatic changes in the roles, composition and work of the board. This assessment must go beyond what other companies are doing. We need a conceptual framework that captures the core elements and central themes inherent in board service. Compensation should then be based on this same framework.

Such a conceptual framework can be established by using a set of core governance principles. Each principle captures a key aspect of board service, and has direct implications for director compensation.

Stewardship

Directors are charged with providing management with continuous oversight and shareholders with seamless continuity over long periods that span changes in CEOs, business strategies, and business units. As the nature of board service has changed from episodic to continuous, requiring ongoing study and focus, fees for meetings and phone calls probably are no longer appropriate. In lieu of this transaction-based compensation, directors should receive a greater fixed annual retainer.

Responsibility

Board members operate at the highest level of responsibility in the company, albeit on a much less time-intensive basis than corporate officers. Board member compensation, therefore, should be set at an equally high level on a daily or hourly basis. A good rule of thumb is that director pay should approximate the daily rate of pay--salary and bonus only--of the CEO.

Different board roles can involve different levels of responsibility, and director pay should reflect these varying rigors. Thus, it is appropriate at most companies to provide separate annual retainers for board service, committee service, chairing a committee, and serving as a lead director or nonexecutive chair.

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