Are U.S. Directors Being Paid Too Much?

It’s no secret that executive pay is markedly high, in stark contrast to the salaries of middle and upper management and especially compared to low-level employees. In late 2023, the average pay for a corporate director was $325,000. And in today’s climate, marked by the rising cost of living and stagnating wages, many organizations are coming under fire for paying their directors such high amounts and not raising salaries across the board.

All this raises the question: Are directors being paid too much?

How Much Has Director Pay Increased?

While the pay for board members is high and still rising, it doesn’t compare to rises in CEO pay. In 2023, the median pay for CEOs was $16.3 million, up 12.6% from the previous year. Median pay for public boards of directors was as follows:

  • Small-Cap Companies: $198,750 (1.9% increase)
  • Medium-Cap Companies: $254,250 (6.6% increase)
  • Large-Cap Companies: $314,000 (4.7% increase)

For the sake of comparison, the median pay for all U.S. workers in 2023 was $48,060.

How High Director Stipends Can Hurt Your Company

This trend isn’t just causing grumblings among lower-paid employees. Discerning investors also scrutinize businesses carefully before investing their money. 

In most cases, members of a business’s board of directors will set their own pay. If a potential investor sees that board members are voting to pay themselves too handsomely, it starts to raise questions of alignment. 

While it’s entirely possible for directors to be paid well and still do right by the companies they serve, an investor might see highly paid directors and think they are more focused on lining their own pockets.

CEOs are more highly paid than directors by a considerable margin, but this doesn’t pose as much of an issue for investors. For one, CEOs don’t set their own pay — the board generally determines total compensation. And often, significant CEO pay is essential when it comes to success. 

There’s an old adage saying you can’t overpay a good CEO, and you can’t underpay a bad one. That often holds true when it comes to deciding compensation. In many cases, a sizable portion of very highly paid CEOs’ compensation comes from performance incentives they’ve reached.

However, one of the most important distinctions between director pay and CEO pay is that a CEO works full-time for the company they represent — a director does not. As a director, you likely hold a position at a separate company in addition to serving on the board. You also might serve on the board of directors for multiple other businesses. 

And because board member positions aren’t full-time commitments, investors may question how much work highly paid members are doing for the amount they make.

The Complexity of Director Pay

The issue of director pay is complicated by the fact that it can be extremely difficult for outsiders to tell exactly how much a director is paid. This is because board members aren’t paid a set salary — and often, total compensation isn’t clearly divided into base pay and equity pay, either. 

For an investor, being unable to get a clear picture of how much each board member is paid may be a red flag.

As a board member, you likely collect an annual retainer. You also might be paid separate meeting fees and collect reimbursement for travel and other expenses. 

It’s easy enough for investors to track cash compensation, but they may have trouble determining equity compensation for each director. You may be offered company stock, restricted stock units, stock option grants, or a combination.

When you’re on the board of directors, you might not see compensation as complex or confusing. But think about it from an investor’s point of view. If an investor can’t tell how much you’re being paid, they may be inclined to believe you’re intentionally obfuscating each member’s total compensation.

If your board’s total compensation is less than straightforward, you might consider taking steps to make it more transparent for investors. That way, you can establish trust with investors and make it clear that no one is trying to hide payment information.

Possible Solutions

Even if you determine that your entire board is being overpaid, you might not be sure how to address the issue. In many cases, if a company believes a board is overpaid, it will take some sort of action. However, you can also address the issue of compensation at the board level. These are some options that other boards sometimes use.

Address the Issue as a Board

As a board member, you might consider broaching the topic of pay with the rest of the board. Are you compensated fairly? Is your compensation excessive? Depending on the overall culture of your board and the situation at hand, this may or may not be a way to successfully resolve the issue. 

Fellow board members may decide they don’t want to consider voting to lower their own compensation. However, you also might be surprised at their willingness to engage.

Let Shareholders Determine Board Pay

This solution takes the pay decision out of your hands and delegates it to shareholders. It can be a difficult decision to make as a board, but it’s also an outstanding way to build trust with shareholders.

Set a Limit

You also might choose to decide on a limit for director pay. However, depending on how low the limit is, this approach might make it harder to recruit high-caliber board members in the future. 

Striking a Balance

As with so many other factors in business, the issue of board member pay is about balance. You need to ensure your compensation is enough to attract quality members who will guide the company in the right direction — and to fairly pay you for your time. 

However, you also need to ensure that compensation isn’t so high that it makes would-be investors think twice. When you take careful account of your situation and determine a fair compensation package for each board member, you’ll be well on your way to a strong, sustainable company that remains an attractive prospect for investors.