Trends in Director Compensation

[Music] [Music] welcome to this edition of diligence inside America's boardrooms I'm TK Kerstetter and I'll be your host for today's show we've got a topic that certainly is interested would be of interest to sitting directors today and that topic is what's next for outside director compensation and joining me is one of our partners Michael Britten who's a partner with Meridian compensation Partners welcome Michael thank you TK it's great to be here so it's always a great topic even the directors say that they really aren't that interested in the pay side of it that's you know not the way it actually works so they are interested so first of all why don't you give us a little history we've seen director pay evolve over the last three or four decades and sort of have some change talked about those changes and and why it's changed sure TK absolutely I think you know in order to talk about where we're headed in the future we really need to kind of look in the rearview mirror to see where we've been and why you know in the early days of outside director compensation you know director pay was really focused on cash retainers and meeting fees little use of stock but you know these are the days of director of pensions and retirement plans Burke was it's you know then fast forward a little bit to the 90s we start to see some of those benefits sort of going by the wayside and we see more prominent use of a combination of cash in stock of course in the 1990s this is also the rise of stock options in the in us the corporate economy and executives and outside directors are starting to see options pretty regularly so it really wasn't until the late 90s and early 2000s TK that we started to see a real sea change in the evolution of director pay a lot of the changes that we've seen over the last 2 K 2 decades in director pay have been related to the evolution of corporate governance practices many of those of course coming from corporate scandal you know Enron and and the like in the early 2000s but then a number of laws and regulations and rules come out of that including sarbanes-oxley and how that implicated and and changed the role of the Audit Committee as well as dodd-frank and then later on changes in the NY SC and Nasdaq listing standards what that really led to Tk was a real heavy emphasis now on cash and stock compensation less use of meeting fees really practically no more director pensions and retirement you see now restricted stock or full value shares take the place of stock options with directors setting pay for equity compensation based on a targeted dollar value versus a share denominated number you also see shorter vesting schedules and that aligns with companies adopting more annual director election practices and you see the rise of new board leader roles independent board leadership roles like board non executive board chair and lead independent director who typically receive premium compensation as well as the use of stock ownership guidelines so really I would say all of the changes really that you can see in the evolution of director pay over the past you know 20 years I think you could really tie back to changes in corporate governance practices so that sort of brings us up to today and if you look today you know last couple of years we're starting to see great interest particularly from the ISS I think they sort of started this but then now it's sort of blended on to other institutional investors as well and you know it surprised me okay that we've gone into director pay I think in the grand scheme of things it's an it but the problem was that there were some outliers that sort of created that attention and even though 95 98 percent of people handle this prudently now we're seeing some cases actually brought to the Delaware courts around director compensation yeah you're exactly right I think companies and boards have somewhat gotten used to the scrutiny that has been on executive pay and now the next phase of this is the scrutiny and the focus on outside director pay and I think you really already touched on like really the two key areas of focus and kind of where this is coming from first it's the Delaware Court rulings with respect to some director pay lawsuits and you know there have been over the past several years a number of lawsuits with respect to director pay really targeting excessive director compensation levels but also some focus on the process in the structure really how boards go about setting their own pay some of the early court rulings with respect to these lawsuits had suggested that as if companies were to adopt quote-unquote meaningful limits on director compensation that would be a good counter action and defense against some of these lawsuits and in fact we have seen in recent studies that majority of large companies do have some kind of limit on outside director compensation and it typically ranges between half a million to a million dollars per director per year some of the more recent court cases though Tk have suggested that these meaningful limits may not be enough and that companies might have to go further to provide adequate defenses against some of these lawsuits but the second thing the second area really that we touched on proxy advisors so is s institutional shareholder services and glass Lewis both have had policies with respect to outside director pay more recently ISS has adopted a policy that will take effect next year where it's seeking to target companies that have excessive director compensation without a sufficient rationale so specifically what they're going to do is look to capture outside director pay at the individual level compare compare that to other outside directors in companies of similar industry sectors and then look to target really the top two to three percent of those individuals and so the implication of course TK is that where a company is identified as providing excessive director compensation consistently being it you know two or more years without a sufficient rationale ISS will start to with offer withhold vote recommendation on the committee members that are overseeing director pay so you mentioned about the cap is there anything else the companies are doing sort of to make sure that they're in line with all these guidelines that are being established for them yeah and I really think that this is the primary impetus this increased scrutiny for you know this next phase of director comp evolution and I'd say you know it really is a call to action for boards and I think we'll probably see about four or five key trends you know in the future as a result of this scrutiny the first of which is really just having boards really define and establish a well structured compensation philosophy and structure with respect to director pay and so what I mean by that DK is establishing the peer group the percentile and pay targeting the frequency of reviews the role of the outside consultant you know the the structure the weighting and the vehicles and then making sure that companies disclose that adequately and thoroughly in their proxy statement I think with respect to frequency which I just mentioned I do think that we're going to start to see boards look at their director pay practices more frequently I think it's important that they get it right that we that they get comfort with establishing that the director pay outcomes are both competitive and reasonable and so many companies as you know TK really have a practice of looking at director pay every two or three years and I think that we'll start to see an annual review of director paid not necessarily two changes every year but looking and monitoring where we are in the market to make sure again that we have it right you know one thing that we could see despite a more frequent review practice would be a moderation of director pay levels going forward at least for the near term and in particular if we are about to enter a period of economic downturn and I do think we could see some flattening out of director pay levels already we're at a point where director pay is increasing in low single digits you know maybe one to three percent you know per year as it is but that could be flattening out and we are again already seeing a very much of a narrowing of the rain of director pay really the fourth thing I think we'll see TK you know will be just you know ensuring that the director pay program again aligns with shareholder interests and best practices and and and just making sure that the process again is well structured well established and again it gets back to transparency in the proxy statement making sure that we are adequately describing you know our approach and that it results in a appropriate and meaningful reasonable level of compensation the last thing and this gets back to the scrutiny in particular with respect to these lawsuits what I do think we could start to see more of which are rare practices now number one director pay programs that are much more prescriptive and that are approved on a regular basis by shareholders and this could be taking the form of formalizing the director pay program and putting it into let's say the stock incentive plan and having to shareholders approve the stock incentive plan that includes the director pay plan as well the other thing that we could see would be a say on director pay of course we have say on executive pay right now is mandated by dodd-frank that's an advisory vote you know thumbs up thumbs down on the executive pay this could be another opportunity for companies to give shareholders the the opportunity to reaffirm that the company's director pay practices and approach and provide me perhaps a little bit more cover you know to some of these lawsuits you know I think either way what we're gonna see is you know TK is that I really do think that we are at the beginning of a new era in the evolution of director pay one that is defined by intense scrutiny and well I'm actually sorry to hear that I mean there's so many things that directors that are should be spending their time on and again I think this in the end other than several outliers this is somewhat of an it you know the grand scheme of things I'd much rather have them spend time on transformation or digital transformation or cyber or strategy I mean but you know I understand how these things happen I just hope that you're wrong in the sense that it gets to the say-on-pay level for boards to whatever so I'll just keep my fingers crossed that you me Bo TK that doesn't get to that level but I wanted to thank you for taking the time it's an important topic obviously we're seeing a lot more scrutiny but I really appreciate that you come in and educate us so thrilled to be here thank you for having me TK and that will conclude this edition of inside America's boardrooms we hope you enjoy the show we'll be back again next week when we take on another critical topic that will help you be a better board member or committee member so we'll see you then [Music] you

Channel: Inside America's Boardrooms

Views: 319

Rating: 5 out of 5

Keywords: Meridian Compensation Partners, Michael Brittian, director compensation, board member compensation, compensation committee

Id: EN1_LZ-8DTI

Length: 12min 14sec (734 seconds)

Published: Tue Oct 08 2019