The directors & boards survey: CEO and director compensation 2014: make director compensation variable based on the contributions each director makes to the company? now there is an idea that our survey respondents seem to approve of.

• Author: Shaw, David

In this year's survey, we asked respondents to reflect on changes they'd like to see in director compensation. The responses fell into two areas: greater equity for the board, and differential compensation for not only greater board responsibility but also greater engagement in board activities. This latter area is, we think, an interesting way for a board to tie results of self-evaluations into something meaningful.

The greatest change in director compensation suggested by our respondents was to increase the use of restricted stock units (RSUs). "The board should be held to similar standards as we hold management." commented a director. "The board should be awarded stock options or RSUs based solely on company performance milestones."

But there was also a strong theme of making director compensation variable based on the contributions each director makes to the company. Many directors recognize that committee chairmanship or serving as the lead director is deserving of increased compensation ("They seem undervalued for the additional work required," noted a director).

"Perhaps there should be occasional discretionary bonuses for truly outstanding board work that translated into a longterm benefit for the company," suggested a respondent.

However, many respondents took this idea of variable director compensation a step further. "We should tie compensation to the results of peer evaluations," said a respondent. "Equity should be offered in proportion to the director's effort and contribution," commented another.

As part of this, another director observed: "We need to strengthen the language regarding board meeting attendance and preparedness expectations."

We find these suggestions of making board compensation variable based not only on company performance but also on the effectiveness of individual director contributions to be an exciting avenue for exploration. Such variable compensation can reinforce the importance of board evaluations, and ensure that this process is taken seriously. And it can also serve as part of the process of retiring and replacing directors who are less effective than their colleagues would like them to be.

Survey methodology and demographics

This Directors & Boards survey was conducted in August 2014 via the web, with an email invitation to participate. The invitation was emailed to the recipients of the Directors & Boards monthly e-Briefing. A total of 288 usable surveys were completed.

CEO Compensation

David...