Board of Directors Compensation Driven By Market Conditions & Opportunity Costs

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The 2010 Board of Directors Compensation Report explores how companies have responded to compliance requirements as well as economic conditions. Over the past ten years, organizational decisions and compensation adjustments were tied directly to increased regulatory requirements. It now appears that Directors’ compensation is being driven by market conditions and the opportunity costs associated with Board participation.

The study finds that total cash compensation, which is the sum of annual retainer and per meeting fees, for Directors increased by 2.6% (on average) and the total cash compensation for the Chairman of the Board grew by 4.7% (on average) in the past year.

The 2010 Board of Directors Compensation Report explores how companies have responded to compliance requirements as well as economic conditions. Over the past ten years, organizational decisions and compensation adjustments were tied directly to increased regulatory requirements. It now appears that Directors’ compensation is being driven by market conditions and the opportunity costs associated with Board participation.

Corporate miscues over the past ten years have created an environment where companies and their Boards of Directors are concerned about transparency and accountability for decisions that affect shareholders’ investment in a company. The Board of Directors has more responsibility now than at any other time in history and the ability to organize how the Board operates and do so efficiently is critical to the success of the company.

According to a new study released by Total Compensation Solutions (TCS), there are significant changes in the way a Board is organized. These shifts represent the reaction to having more accountability as well as transparency. Paul Gavejian, Managing Director of TCS notes, ““It’s more than a shift in duties,” it’s a shift in attitudes.” Mr. Gavejian notes, “Board members want to serve the company and they want to make certain that their efforts are perceived as positive contributions.”

The areas that appear to be experiencing the most dramatic change include: number of meetings held per year; number of actual Board members; and the roles played by board members. In this report, TCS collected data on key elements of Board structure including: number of directors, number of meetings, term length, Board responsibilities and type of committees. Data from this survey indicates that:

  •     the average number of board members is nine
  •     the average number of meetings per year is nine.
  •     the most prevalent term length is one year at fifty-one percent (51%) of companies. The second most prevalent term length is three years at forty-eight percent (48%) of companies.
  •     Thirty-four percent (34%) of the companies in the study have a Lead Director. This is up from 23% from last year.
  •     Forty-six percent (46%) of the companies have a Chairman who is also their CEO.

As Board member responsibilities and time commitment have increased, so have their compensation arrangements. “Board members are spending more time on Board activities and less on their ‘real’ job,” says Gavejian. “There needs to be some recognition for their efforts and this usually comes in the form of increased compensation for Board activities.”

The study finds that total cash compensation, which is the sum of annual retainer and per meeting fees, for Directors increased by 2.6% (on average) and the total cash compensation for the Chairman of the Board grew by 4.7% (on average) in the past year.

“In 2010, compensation for Board service was influenced by reduction of per meeting fees which fell by almost 4%” according to Gavejian “The study found that many Boards have had fewer meetings than in the past, thereby saving on the multiple per meeting fees previously paid.”

The 2010 Board of Directors Compensation Report explores how companies have responded to compliance requirements as well as economic conditions. Over the past ten years, organizational decisions and compensation adjustments were tied directly to increased regulatory requirements. It now appears that Directors’ compensation is being driven by market conditions and the opportunity costs associated with Board participation.

“Those types of requirements came with strings attached including: a greater time commitment for Board members and a higher retainer to compensate these Directors for their time and expertise” says Gavejian. “Now, these Boards are returning to a market-based model for setting pay which accounts for the Directors’ time commitment and opportunity costs. This may help as a cost savings initiative.”

This survey compiles data from 516 U.S. based organizations in 12 industry groups. In addition to pay issues, the TCS survey also observes a significant change in the way governance is applied through the various standing committees of the Board of Directors. The increased accountability of the audit, compensation and governance committees has dramatically increased the time commitment of Board members who serve on these committees.    

Copies of the 2010 Board of Director Compensation Report are available from TCS (http://www.Total-comp.com). If you have questions regarding this report, please call TCS offices at (914) 730-7300 or email questions to: pgavejian (at) total-comp (dot) com or tbailey (at) total-comp (dot) com.

Total Compensation Solutions is an independent human resources consulting firm dedicated to assisting clients in achieving their strategic compensation objectives. The firm uses market data to identify best practices in a variety of topical areas including: board compensation; executive, middle management and staff compensation; performance management; organization structure; health and welfare; and retirement benefits. From offices in Armonk, NY, Los Angeles, and Philadelphia, TCS gathers and reports information on compensation, personnel practices and benefits and applies the most effective, market-driven solution to each organization’s unique set of circumstances. For more information on TCS, visit http://www.total-comp.com

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Thomas Bailey
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