Percent of Executive Directors That Dont Get an Annual Review
Director Compensation Practices in the Russell 3000 and S&P 500: 2021 Edition documents trends and developments in non-employee director compensation at 2,855 companies issuing equity securities registered with the US Securities and Exchange Committee (SEC) that filed their proxy statement in the period between January i and December 31, 2020, and, as of Jan 2021, were included in the Russell 3000 Index. The project is a collaboration among The Conference Board, compensation consulting firm Semler Brossy, and ESG data analytics firm ESGAUGE.
Data from Director Compensation Practices in the Russell 3000 and S&P 500: 2021 Edition can be accessed and visualized through an interactive online dashboard at https://conferenceboard.esgauge.org/directorcompensation. The dashboard is organized into half-dozen parts.
Part I: Compensation Elements, with benchmarking information on the prevalence, value, and year-on-year increases of cash retainers, meeting fees, stock awards, stock options, and any benefits and perquisites.
Office 2: Supplemental Compensation, including the greenbacks retainer and coming together fees granted for serving on board committees and the premiums offered for board and commission leadership roles.
Office Iii: Equity-Based Bounty, which reviews cash and equity compensation mix, the prevalence and value of various equity honor types, and the vesting schedules of awarded equity.
Function IV: Stock Buying Guidelines and Retention Policies, for a detailed analysis of the features of ownership guidelines for board members (including their disclosure, their compliance window, the definition of ownership adopted, and whether the guidelines revolve effectually a multiple of the cash retainer or a specific number of shares) and the types of retention requirements applicable to equity-based compensation (including the retention ratios and the duration of the retention period).
Part V: Bounty Limits, including the prevalence of limits by type (whether total compensation limits, dollar-denominated limits or share-denominated limits) and the median and average value of these ceilings.
Office Six: Deferred Compensation and Deferred Stock Units (DSUs), including elective and mandatory deferrals, to what compensation element the deferral applies, the form of the deferred compensation payout, the employ of deferred cash investment vehicles (such every bit money-market or savings accounts, retirement accounts, or others) and the prevalence, value, holding requirements, vesting periods, and payout forms of DSUs.
Compensation figures included in Director Compensation Practices in the Russell 3000 and S&P 500: 2021 Edition reflect the disclosures made in the director compensation tables and narratives included, under SEC rules, in proxy statements filed during the examined menstruation.
The post-obit adding methodologies were applied. The calculations extend to the unabridged sample of companies, including those reporting no value for any of the bounty components or supplemental compensations described:
- Total Compensation figures are the sum of all compensation elements paid to each member of the board of directors (including cash retainer, total coming together fees, stock awards, and stock options but excluding the values reported under "other compensation," which ofttimes display significant variations from company to visitor) plus the per-manager value of the supplemental compensation paid to committee members (sectional of any leadership premiums).
- Unlike Total Compensation, Total Board Service Compensation excludes whatever supplemental bounty paid for committee service.
- Total Actual Bounty is the average of the amounts really received by each managing director on the lath, as reported in the Director Bounty table included in the proxy statement. Since the compensation paid to individual directors varies based on commission membership, leadership role, meeting omnipresence, and time of appointment, the average across the lath is calculated.
- Total Commission Service Compensation is the sum of all cash retainers and full meeting fees for all meetings held across all standing or special committees of the board, divided by the number of directors. Information technology excludes lath chair premiums and committee leadership premiums. The sum of Full Commission Service Bounty and Total Lath Service Bounty then equals Full Bounty.
- Total Commission Leadership Premium is the sum of the premiums paid to the directors serving as chairs of standing or special committees of the board, above the value of a commission member'southward bounty.
Total Compensation is reported two ways: sectional of initial equity premiums and inclusive of initial equity premiums on an annualized basis. For the calculation inclusive of initial equity premiums, the premium was annualized over a v-yr period: Every bit a issue, the figures reported represent 1/5 of any initial equity premium value.
Compensation figures are reported for the amass Russell 3000 and the aggregate South&P 500. Russell 3000 figures are also segmented according to business industry and company size. The industry analysis aggregates companies within 11 groups, using the applicable Global Manufacture Classification Standard (GICS). For the visitor-size breakdown, data are categorized forth seven annual-acquirement groups (based on information from all GICS groups except for companies in the Financials and Real Estate sectors) and seven asset-value groups (exclusively based on data reported past companies in the Financials and Real Estate sectors, which tend to utilize this blazon of benchmarking). Annual revenue and asset values are measured in US dollars equally of December 31, 2020.
The following are the key findings.
Manager pay reported in 2020 filings continued the upward trends reported in contempo years, as figures reflect decisions made earlier the pandemic. For a few industries and some companies, increases were substantial, reflecting an every three-to-four-yr bike of adjustments to bring director pay to market instead of the annual increases often awarded to executives. Moves toward a simpler approach to director compensation policy continued as well.
Co-ordinate to proxy statements filed in the January 1-December 31, 2020 period, the median Total Compensation awarded to a board member in the latest fiscal twelvemonth (most frequently, 2019) was $189,980 in the Russell 3000 and $280,000 in the Southward&P 500. In both indexes, these figures represent an increase from the previous fiscal year: the charge per unit of growth was higher (four.half dozen pct) for companies in the Russell 3000 compared to the S&P 500 (1.8 percent).
These changes appear to be driven primarily by the ascent in the value of equity awards. According to 2020 disclosure documents, the median value of disinterestedness awards made to board members increased by 7.vi per centum since the prior year (from $110,000 to $118,355) in the Russell 3000 and by 2.4 percent (from 165,000 to 168,933) in the Due south&P 500. On the contrary, the dollar amounts of cash retainer and total meeting fees granted to directors in the index were flat since the prior reporting year, with meeting fees used in director compensation policies by merely 17.4 percent of Russell 3000 companies and 12.five percent of South&P 500 companies. Meet p. 15 for how Total Bounty is calculated for the purpose of this study.
The Russell 3000 analysis past business sector shows that the highest year-on-year increases in the median value of Total Bounty occurred in the Materials and Financials groups (8.2 per centum and 7.1 percent, respectively), while the lowest were reported past companies in the consumer product sectors (0.7 percent in Consumer Discretionary and 0.ix percentage in Consumer Staples). At least in role, this disparity tin exist attributed to the fact that, while director pay may exist reviewed annually, it is rarely also adapted annually. In fact, information technology is more likely to be increased only once every three, iv, or even 5 years. Nosotros can expect to see this practice continuing considering compensation committees typically do not want to increase director pay by incremental amounts, generally waiting until a substantial market correction is necessary before recommending changes. Information technology is also worth noting that, while the Financials sector reported one of the highest almanac rates of increase, the median financial visitor granted the lowest Total Compensation to its directors ($116,554, according to 2020 disclosure documents, or near half of the $221,875 paid by the median company in the Consumer Staples sector).
For comparison purposes, median increases in non-employee director compensation lagged backside CEOs and named executive officers (NEOs). For CEOs in the Russell 3000, the increase in median total compensation (i.e., the sum of the disclosed target value of compensation elements, such equally base salary, annual bonus, stock awards, and stock options) was 7.8 percent. For CEOs in the S&P 500, the increase in total pay was four.8 percent. For NEOs in the Russell 3000, the increase in median total compensation was ix percent, and three.vii for NEOs in the Southward&P 500. [one]
Since the onset of the pandemic, a significant proportion of boards temporarily reduced or eliminated their pay, and few felt that an increase in retainers going frontward was appropriate. Every bit a issue, despite the exponential growth in lath members' workload, the electric current disclosure flavour is likely to reveal an stop (or a pause?) to the trend of rising manager compensation recorded in recent years.
While the median Full Compensation of directors reported in 2020 filings increased, the data on Total Actual Compensation from this yr's proxy statements volition nearly probable paint a different film. Non only were many managing director retainers reduced during the pandemic, only owing to economic challenges of various kinds, it is probable that predictable or planned increases will have been postponed. In fact, increases contemplated during the fall of 2019 and instituted in the early months of 2020 may have been adjusted back down once again at some companies.
Our Database of COVID-Related Bounty Changes
Although cuts to managing director retainers due to the pandemic may be partially restored every bit the economical recovery continues, in 2020 compensation reductions were widespread.
Co-ordinate to a database created past ESGAUGE in collaboration with The Conference Lath and Semler Brossy, through March 31, 2021, 695 companies in the Russell 3000 alphabetize announced adjustments to pay levels; of those, 416 included both executives and directors, while the remainder applied only to executives. In the sample of managing director pay cuts, 25 percentage of the companies opted for the full forfeiture of cash retainers, while another 25 percent of companies applied cuts of between zero and 25 percent. Some 15 percent of the sample cutting retainers by half and 17 percentage cutting them by a quarter of their value. In most instances, pay was reduced in the same proportion as for executives, but in 82 cases director pay went down past more than for the CEO.
For the current list of Russell 3000 and Due south&P 500 companies that made this announcement, access the public database.
* TBD indicates that the company disclosed the reduction but not its magnitude.
Several other factors are putting downwardly pressure on the Total Actual Compensation of directors.
The tendency away from per-coming together fees (toward fixed-fee retainers) will hateful there is no compensatory upside to the marked increase in meetings in response to the pandemic. Since the onset of the COVID-19 crunch, directors had to encounter much more frequently, as reported in recent months and confirmed by data on board practices maintained past ESGAUGE and The Conference Board. [2] If, in the past, such a ascension in the number of meetings would accept led to an increased level of compensation for directors, under the new circumstances this increased workload is unlikely to have similar effects.
Among those that do still pay meeting fees, around 70 percent of companies accolade them for alive meetings only. Only about 30 per centum pay them for both live lath meetings and telephonic or videoconference meetings. Almost all lath meetings were remote during 2020, which may besides keep a hat on pay for some directors. Therefore, a change to this policy might exist forthcoming, with companies potentially paying the same for remote meetings as in-person. [3]
That all said, the volatility of the stock market may also have had a dampening upshot, at least initially, on the "take-home" value of director bounty. The standard manner of computing equity awards (i.eastward., a stock-still value of shares, either stock or stock options) might accept resulted in directors receiving more shares at lower prices if those shares were granted during the initial depths of the pandemic.
Therefore, the policy of granting stock based on a fixed value could exist subject to some change or, at least, adaptation. Undoubtedly, many companies had to make adjustments to the manner they calculated share awards. These have included delaying grant dates until share prices take normalized, using six-month trailing average stock prices or premium pricing stock. New plans may brand allowances for these kinds of adjustments to be an integral part of a flexible policy adapted to come across any situation.
Recruiting a new breed of diverse directors with unlike experience and skills may require significant changes to director pay structures, including adjusting bounty levels upwards to brand posts more attractive to in-demand talent. For directors who are not former CEOs, having pay in the grade of equity that is likely locked upwards until retirement may not be much of an incentive to bring together a board, leading companies to seek new, artistic solutions such as signing equity grants or different equity/greenbacks ratios.
While at that place is a strong impulse to constrain pay levels given the current circumstances, many companies must keep their director compensation policies attractive to a various slate of candidates with relevant operating expertise in the evolving business concern landscape. The new demand for diversity in the boardroom may as well further accentuate the director recruitment challenges encountered by smaller companies and certain industries. For some years, our information has been showing that nearly twice the proportion of Russell 3000 companies (21.viii percent, according to 2020 disclosure) offering a sign-on equity grant to newly elected directors, compared to the S&P 500 (12.3 pct). This finding is even more pronounced in the Wellness Care sector, where equally much as 57.six percent of companies offering a sign-on bonus.
In the confront of economic concerns, companies are reluctant to permanently increase compensation levels for newly recruited directors; therefore, they may favorably view the use of sign-on disinterestedness grants or the offer of a pick amid compensation packages with different disinterestedness/cash mixes. Some directors, especially those who may not be coming to the board with a long career equally a corporate executive, may benefit from these onetime grants and a somewhat higher portion of greenbacks compensation. To avert whatsoever negative attending from proxy advisors or shareholders' concerns, boards should disclose such awards and explain their rationale, particularly that they are non-recurring payments (if that is indeed the instance).
Few companies, either in the Russell 3000 or the S&P 500, accept either mandatory or a combination of mandatory or elective deferred bounty policies, and so this practice is unlikely to exist a significant barrier to recruitment. Even so, more a quarter and just less than half of the Russell 3000 and the S&P 500, respectively, have a combination of stock buying guidelines and retention requirements—sometimes until retirement or resignation from the board or, at to the lowest degree, until share ownership requirements have been met.
Mandatory deferral policies, concord-until-retirement or post-retirement provisions, and other stock retention provisions that defer transfer or vesting of stock until afterwards a manager leaves the board could impair the companies' ability to recruit in-need candidates. It will so be helpful to monitor how these policies evolve in the coming years.
The pecking club of standing board committees when information technology comes to committee bounty (audit at the top, followed by bounty and so nominating/governance) may be in for a reshuffle equally director responsibilities and workloads alter and expand to human uppercase management, environmental, social, governance skills and disclosures, multifariousness and inclusion—few of which come up under the purview of the audit committee.
Typically, supplemental commission fellow member compensation is highest for the inspect committee, followed by the compensation committee, with nominating/governance commission in third place. Our most recent Russell 3000 information, in particular, testify that inspect commission members earn, at the median, an annual supplemental retainer of $10,000, compared to $7,500 for compensation committee members and $5,000 for nominating/ governance committee members. The leadership roles at these committees are also rewarded differently, with audit commission chairs paid an almanac premium of $15,000, compared to the $10,000 granted, at the median, to their counterparts at the bounty and nominating/governance committees.
In recent years, the workload and breadth of directors' responsibility have been rising, equally evidenced by an increasing number of meetings. [4] Additional responsibilities encompass areas such equally the oversight of environmental, social, and governance (ESG) practices, the promotion of policies advancing diversity, equity, and inclusion (DE&I) in the workforce, and the mitigation of risks related to climate change. At the same time, scrutiny of managing director pay levels is intensifying, aslope increased scrutiny of executive pay, for which directors are responsible. This expansion is beginning to bear on the continuing of committees.
The general principle in committee pay is to compensate for the additional workload required to perform the specific tasks assigned to a committee. Every bit a issue, over fourth dimension and one time the electric current crisis has passed, these developments may drain through to director pay levels in the form of increased supplemental retainers for committee service. In detail, if the compensation committee is given responsibleness for the oversight of DE&I while the task of hiring directors with ESG experience is assigned to the nominating/governance committee, it is likely that compensation premiums for the service on (and the leadership of) those committees will increase and catch up to inspect retainers.
Similarly, pay for leadership roles inside the board may begin to outpace the overall growth rate of standard director bounty. Data on leadership premiums published in 2020 proxy statements already show a rise in the median servant for the chair of the nominating/governance committees at the largest United states public companies by annual revenue—to $20,000, from $15,000 of the prior disclosure twelvemonth. Information technology might be an early indication of the potential developments in supplemental bounty for board commission leaders.
Another indicate to consider is that, while some companies try to calibrate compensation based on committee workload, others do not pay extra for committee chairs or committee service. It happens because they understand that the duties and workloads will change over time or considering they don't want to impair commission members and chairs' rotation or create divisions within the lath. With this in listen, the convergence described above could be a further opportunity to take a fresh await at whether supplemental compensation for commission membership and leadership should be used at all.
While instances of excessive manager pay sporadically come to the fore, the spotlight on board compensation from shareholders and proxy advisory firms affects all companies. As a result, pay ceilings in disinterestedness plan documents are more common, and advisory votes on board pay (or on those directors who decide board pay) could go a more frequent proxy thing.
Fifty-fifty though shareholder litigation fears over excessive managing director pay [five] may have subsided in the past couple of years, the number of companies applying a ceiling to director bounty continues to grow. Co-ordinate to our review of proxy statements, in the final three disclosure years, the percentage of companies reporting some type of director pay ceiling has grown, from 48.7 to 61.5 in Russell 3000 and from 53 to 66.9 in the Due south&P 500. Especially, the share of companies setting limits on total director compensation (whether fabricated of cash only or greenbacks and equity) has risen to 26.ix per centum in the Russell 3000 and 28.9 percent in the S&P 500 (from the 16.1 pct and 18.ix percentage reported, respectively, in 2017 filings). Moreover, about 30 percentage of South&P 500 companies have dollar-denominated equity limits, and sixteen.3 percent of Russell 3000 companies disembalm share-denominated disinterestedness limits.
The introduction of compensation limits for directors mitigates the risks of litigation. Information technology may also head off objections from proxy advisors. In particular, ISS considers the adoption of pay limits when assessing not-executive manager compensation policies for which management seeks shareholder ratification. [6] It also recommends a vote against directors responsible for setting lath compensation at a company that shows excessive director pay for 2 successive years—unless information technology discloses "a compelling rationale or other mitigating factors" for being an outlier. [7] (Drinking glass Lewis, the other large proxy advisory service in the Usa, too warns most the dangers of excessive managing director pay equally information technology can compromise the objectivity and independence of non-executive directors. However, its guidelines are non specific on what should be viewed as "excessive" and do non equally emphasize the importance of benchmarking past company size and industry. [8])
The Definition of Outlier and the Importance of Benchmarking in Setting Director Pay
The ISS voting policy defines outliers as those companies reporting director pay figures in a higher place the top two percentage of all comparable directors within the same index and ii-digit GICS business sector grouping.
In practice, within those groupings, the distribution of managing director pay data can be much more compressed than the one often observed for executive compensation, underscoring the importance of stress-testing director bounty in unlike benchmarking scenarios. For case, according to our data, in the Russell 3000 Consumer Discretionary sector, the difference in full director compensation between the median and the 90th percentile can amount to simply $68,008, or 32.6 percent of the median (a fraction of what is typically seen in executive compensation information). Therefore, companies should be mindful of the furnishings on full compensation of program features such as coming together fees and guidelines applicable to fixed-share grants. In a year of frequent meetings or rapid share price appreciation, these features could easily movement the company's directors to the college terminate of the peer comparative range.
The ISS policy recognizes that board-level leadership positions, such as non-executive chairs and pb contained directors, are oftentimes paid more than other directors and thus compares such positions to similar roles. Reasons that might mitigate a company'southward position as an outlier include the payment of legacy retirement benefits or incentives earned as an executive only paid after becoming an exterior director.
Over time, and for the reasons but explained, a ceiling for director disinterestedness pay may get a standard role of all or most director disinterestedness plans. To identify a ceiling on cash payments, direction could submit a proposal on the specific issue of director compensation limits for a vote at the next almanac coming together. This practice would provide similar legal protections as disinterestedness pay ceilings in equity plans. Alternatively, a alter in the board or commission charter that applied an overall ceiling to full director compensation amounts although it would not grant legal protection unless as well ratified by shareholders.
Endnotes
1Paul Hodgson and Matteo Tonello, CEO and Executive Bounty Practices in the Russell 3000 and S&P 500: 2020 Edition, The Briefing Board/ESGAUGE/Semler Brossy, November 2020.(get back)
2Rusty O'Kelley et al., Corporate Governance Challenges in the COVID-xix Crisis: Findings from a Survey of The states Public Companies, The Briefing Lath/ESGAUGE, June 2021.(go dorsum)
3Matteo Tonello, 2021 Proxy Flavour Preview and Shareholder Voting Trends (2017-2020), The Conference Board/ ESGAUGE, January 2021.(go back)
4For a review of contempo data on the frequency of lath commission meetings and the expanding committee responsibilities, meet Matteo Tonello, Corporate Board Practices in the Russell 3000 and S&P 500: 2020 Edition, The Briefing Board/ESGAUGE, October 2020.(go dorsum)
fiveFor a discussion, see the terminal edition of this study: Marker Emanuel, Todd Sirras, and Matteo Tonello, Director Compensation Practices in the Russell 3000 and S&P 500: 2020 Edition, The Conference Board/ESGAUGE/ Semler Brossy, April 2020.(go back)
sixUnited States Proxy Voting Guidelines: Benchmark Policy Recommendations, Institutional Shareholder Services (ISS), November 19, 2020, p. fifty. Where companies exercise offer upward their director compensation policy to a shareholder vote, ISS will assess factors such equally the relative magnitude of manager bounty as compared to companies of a similar contour, disinterestedness honour vesting schedules, the cash-equity mix, and meaningful limits on director compensation.(go dorsum)
7Id., p. 16.(go back)
viii2021 Proxy Paper Guidelines: United States, Glass Lewis, p. 47.(go back)
Source: https://corpgov.law.harvard.edu/2021/06/16/director-compensation-practices-in-the-russell-3000-and-sp-500/