Board pay has always been an interesting --and sometimes uncomfortable --topic for outside directors.
It's uncommon to set one's own pay level, and doing so as a steward of a corporation and its shareholders can be uncomfortable. Add to this the December 2017 Investors Bancorp lawsuit--which brought a new challenge to protections under the "business judgement" rule--and a subsequent ruling by the Delaware Supreme Court, and board pay has even the most coolheaded outside directors wringing their hands in anticipation of potential criticisms of their best efforts at getting it right.
We offer here three simple rules for stress-free board pay, even where the long-standing and board-favorable business judgment rule has taken a major hit. By following these rules (which are reflective of leading practice today), outside directors are unlikely to become a target for plaintiffs' lawyers.
* Target your total director pay to the mid-range of the competitive market.
* In order to do so, you need to know your competitive market. For most companies, the right "market" definition for director pay is the same as for executive pay: a peer group of one to two dozen companies of comparable size and business focus; and broader-market, survey-reported information.
* Further, you need to test the market regularly. For most companies, this means comprehensive benchmarking of director pay levels and structure every other year. Why every other year? Director pay should remain fairly consistent year to year, and therefore market benchmarks are fairly stable over time.
* In recent years, the range from highest- to lowest-paying boards has narrowed considerably. It's common in peer groups today to see high-low spreads that range only about 20% from the median. This reversion to the midpoint means that "outliers" are that much easier to identify (especially for the plaintiffs' attorneys who seek them out).
Practice great hygiene
* Establish meaningful limits on director pay. Many companies have done this by setting annual limits on equity to directors. Generally, the new model for "meaningful limits" sets a dollar-based maximum on equity grants between $500,000 and $lm. Some companies have extended these limits to director pay, overall, inclusive of cash and equity.
* Beware of fixed-share grants. Today, most companies grant a dollar value of equity each year to directors. This approach makes it easy to manage total pay consistently year to year. Some...