August 11, 2021 Executive Compensation Executive & Director Pay Design First Question

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Executive & Director Pay Design

What is the Role of Director Pay? Supporting the company board

Stay competitive with your Director Pay decisions to attract the best talent and avoid criticism by following our checklist:

Concept

Understand how director compensation can advance and support the company’s board and talent objectives.

Objectives

  • Attract talented director candidates with the diverse skillsets and expertise necessary to execute on board responsibilities
  • Provide competitive levels of director pay that is fair and equitable relative to other director responsibilities
  • Understand where external scrutiny may exist and how to protect against potential criticism

Challenges

  • There is an ever-increasing need for talented directors with a broader range of skillsets to address new topics in the board room – e.g., environmental, social, and governance (‘ESG’) issues
  • Competition for directions with certain characteristics is higher than ever (i.e., gender and racial diversity, digital expertise)
  • Among companies of a similar size and industry, market practices and director pay levels have generally converged into a narrow range of practice, limiting companies’ ability to use pay as a differentiator
  • Companies have to be careful regarding the right time to make increases (considering external scrutiny and company performance) to ensure the program remains competitive
  • Proxy advisors such as ISS will vote against directors whom they deem to have excessive compensation (i.e., top 2% of all comparable directors with the same industry group and index group)
  • Companies that do not have an equity plan provision to limit individual director compensation are at a higher risk of shareholder litigation over perceived excessive pay

Initial Checklist

  1. Determine if the board currently has the proper skillsets needed and whether there are any concerns with attracting the necessary director talent
  2. Ensure the director pay program is competitive and consider the role of initial equity awards for new directors in an effort to attract more director talent
  3. Perform regular market reviews of director pay to determine whether pay levels and practices are competitive and commensurate with director role and responsibility
  4. Establish director pay review cadence and general philosophy for subsequent pay adjustments (e.g., should adjustments be made annually or every 2-3 years?)
  5. Assess whether there are extenuating circumstances that would require changes to pay (e.g., shift in BOD roles) or factors that would cause directorpay adjustments that may attract negative attention externally
  6. Evaluate whether any individual director’s pay in a given year is considered “excessive” relative to ISS standards
  7. Consider implementing an equity plan provision that limits individual director pay within a given year to reduce shareholder litigation risk

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