Trend in director compensation: Simpler, more transparent.

• Author: Cook, Frederic W.
• Position: BOARD REPORT

Ed. Note: A major survey of director pay comes every year from compensation consultancy Frederic W. Cook & Co. Inc. The firm's 2013 Board of Directors Compensation Report was released in December 2013. This report includes 300 publicly traded companies in the financial services, industrial, retail, technology, and energy sectors, divided into three size categories based on market capitalization. The following is from the report's executive summary, which highlights key findings from the latest survey.

Director compensation levels have stabilized since the introduction of the Dodd-Frank Act, with recent increases in the low to mid single digits (i.e., 3% to 6%). Compared to last year, small-cap companies had the largest increase in total director compensation. Director workload and scrutiny continues to increase, especially for compensation committee members, in light of Say-On-Pay and continued media attention.

From a design perspective, the trend is toward simpler, more transparent director compensation programs that reward directors based on their role while recognizing the importance of independence and the goal of aligning director and shareholder interests.

Companies are moving away from board and committee meeting fees to simplify administration and communicate that attendance is expected. In addition, companies are replacing stock options with deferred or restricted shares to provide stronger align- ment between directors' and shareholders' long-term interests and to address investor concerns about the appropriateness of stock options due to their risk and reward profile.

Total Compensation Levels

* Total compensation levels are largely dependent on company size, while the relationship between pay levels and industry is less apparent. Median total compensation for board service is summarized in the accompanying exhibit.

* Median total compensation increased at a faster rate in small-cap companies compared to mid- and large-cap companies.

* Industrial and technology companies have the first and second highest median total compensation levels, respectively, while financial services companies have the lowest.

Cash/Equity Mix

* The financial services sector pays the highest portion of total compensation in cash (55% of total compensation) and technology companies the lowest (34% of total compensation in cash).

* Small-cap companies pay the highest portion of total compensation in cash (53% of total compensation), and large-cap companies...