Pay practices for board chairs.

Position:BOARD STUDY - Excerpt
 
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Ed. Note: Compensation Advisory Partners recently studied pay levels and pay practices for board chairs. An excerpt from the study follows.

Based on a review of companies ranging from $1 billion to $20 billion in revenue, we found that approximately 10% of companies operate with an Executive Chair and 45% have a Non-Executive Chair. Among the 10% with an Executive Chair, approximately one-half are founders (or have significant ownership in the company, i.e., more than 15% of shares outstanding), and the majority were former CEOs. This fact pattern is a very rational and effective progression, providing a smooth transition and advantages to the new CEO, shareholders, and the company's overall operating efficiency. In the case of Non-Executive chairs, it is more common for the role to be filled from outside the company or by a member of the board of directors.

The need for and role of a separate COB evolves for different reasons. The responsibilities and time commitment of this role can vary greatly by company. Many founders step out of the CEO role to reduce their time commitment, but continue on as COB for many years so they can oversee the results of the company and weigh in on the company's performance and strategy.

Alternatively, the board may ask an exiting CEO to stay on for a year to help with the transition to a new CEO and provide continuity to the organization. It may be that an exiting CEO stays on to oversee a major initiative that needs dedicated oversight. The role could evolve as a result of a spin-off from an existing public entity. The COB is most often an advisory role, with no oversight of daily operations.

We frequently see the following pay practices:

* Since many COBs have transitioned from the CEO role and have accumulated a large equity stake, or are founders with significant equity ownership, equity compensation tends to account for a smaller portion of the compensation package when compared to current CEOs.

* More companies grant stock options or restricted stock with time-based vesting, instead of granting long-term performance-based compensation. We believe time-based vesting is appropriate because the Executive COB role is often more advisory in nature, rather than contributing to operational decisions that impact long-term financial performance. There may also be uncertainty associated with the length...

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