Outside Director Pay Rises, Shifts to Fixed Values

Hoping to reduce variable increases, large U.S. companies increased outside director compensation moderately in 2015.

According to an analysis by Willis Towers Watson of proxy statements from 250 companies within the Fortune 500, the median value of total direct compensation for nonemployee directors rose 3 percent to an average of $236,500.

The average compensation mix remained stable at 43 percent cash and 57 percent equity, with cash figures increasing 6 percent and equity awards rising by a median 3 percent. A fifth of the companies increased their annual cash retainers by 9 percent at the median.

More companies in the study sample took steps to reduce variable director compensation. On a cash basis, committee meeting attendance fees were offered by only 18 percent of companies, down from 22 percent. Similarly, flat retainer-based pay for committee service was offered by 27 percent of the companies, a slight year-over-year increase from 25 percent of sampled companies.

Forty-two percent of the companies in the analysis provided a base annual retainer as the sole form of cash compensation, compared with 40 percent last year.

Inspired in part by shareholder litigation alleging excessive compensation of directors, companies are increasingly imposing “meaningful” annual limits on awards to directors. Overall, 42 percent of the sampled companies have a director-specific award limit in place, with half of those limits being adopted or amended since 2015.

Stock options are also becoming less popular as a form of external director compensation, and were offered by only 8 percent of the sampled companies (compared with 10 percent a year ago). Overall, 97 percent of companies granted one or more types of full-value shares to outside directors.

Mandating Share Ownership

Stock ownership and retention mandates remain an important component of director compensation, with 93 percent of the sampled companies having requirements for either or both. The number of companies imposing a requirement that directors retain all or a portion of their stock grants increased slightly, rising from 40 percent to 41 percent in the past year.

For companies with this mandate, 46 percent require stock to be held until specified ownership guidelines are met, while 47 percent stipulate that stock be held as long as the director serves on the board. Other companies with a stock retention policy require equity to be held for a specified length of time.