How Much Is Too Much? Examining Trends in Board Compensation

How much is too much? That’s the critical question facing governing boards today, as stakeholders are looking more closely at large compensation packages. At the same time, board members are facing more complex business environments than ever before, and to an extent, their additional time and energy are worthy of additional compensation.

How does your organization handle board member compensation? The following trends and patterns can help boards create compensation packages that are appropriate for the role while also aligning with the company’s commitment to its employees, shareholders, and values.

A Payment Mix for Board Members

Public boards use a mix of compensation strategies, including:

  • Annual, fixed board fees
  • Specialized compensation for select leadership roles (chair and committee chair)
  • Committee fees
  • Stocks and stock options

Depending on the company, leadership boards may also be awarded travel allotments, performance-based bonuses, or other perks for their service. 

Equity remains a significant component of the compensation package. The latest data reveals that, on average, board directors receive 37% in actual cash, while the other 63% consists of company equity

These payments are usually distributed on an annual basis in a one-sum fee. That said, stocks with dividend payments may provide passive income according to the regular dividend payout schedule.

Restricted stock units remain the most popular way to distribute equity among board members. But any stock option is considered to be a worthy compensation strategy. That’s because taking direct ownership in the company means leaders will have added incentive to make bold decisions, especially during crucial phases of the company’s development.

Customization for Specific Roles

While many companies use something of a pay mix, others choose to customize their compensation packages, particularly to reflect specific roles. For example, companies typically use a fixed retainer fee for their board members but may award additional premiums for chair or co-chair positions within the board.

Additionally, compensation is increasingly tied to the board member’s performance or contributions. Both equity compensation and cash compensation can be a reflection of the complexity or skill associated with certain positions. 

Depending on the nature of the board composition, there can be additional perks, too. These sometimes include travel expenses to assist board members in coming to and from meetings.

This trend largely replaces the former practice of meeting fees, where board members were compensated simply for attending a meeting (in-person or online). Instead, retainer fees and premiums are designed to incentivize leaders to take on distinct roles within the board, though even this trend is in a current state of evolution.

Simplification: Moving Beyond Retainer Fees

Retainer fees and other compensation packages are still in use. However, many companies are choosing to simplify their board member pay structures now that they’re facing increasing scrutiny from investors and other stakeholders.

This typically means the complete elimination of retainer fees and premiums for select positions. Instead, companies are choosing to offer a simplified payment package consisting of a mixture of direct payment and some form of equity. 

Businesses can simplify this compensation package even further by providing these payments on an annual basis. When doing so, they might eliminate performance-based bonuses or other incentives.

As you might imagine, making changes like this creates unique challenges when comparing compensation packages between companies. Admittedly, some executives may be drawn to corporations that continue offering these rewards. 

That said, there are positives to companies continuing to simplify and streamline their compensation packages. Over time, it will actually become easier to compare boardroom compensation between companies and against industry benchmarks.

Emphasis on Reasonable Pay

Arguably, the most important recent compensation trend has been the emphasis on “reasonable” pay. To this end, stakeholders point to the pay gap between the company’s top earners and the average employee and question whether board compensation is truly in line with the leadership’s responsibility to the company. These same stakeholders expect that any compensation package (or increase thereof) be reasonable given the company’s history and priorities.

The challenge, of course, is demonstrating that a compensation package is, in fact, reasonable, offering pay that’s consistent with the board member’s actual contribution. The best practices usually involve radical transparency regarding the roles and accomplishments of board members in addition to their compensation packages.

In an age of shareholder activism, companies may expect greater scrutiny from stakeholders and investors. Clear, transparent communication will be key to helping others understand the rationale behind compensation strategies. It may even lead to greater overall trust in corporate governance strategies.

Compensation Based on Modern Metrics

Thanks to the rising demands placed on leadership teams due to technology and compliance issues, boardroom positions are becoming increasingly complex. As a result, compensation packages are designed to reflect the time commitment and overall skill set that a leadership position requires. Compensation is also designed to reflect results in these high-profile areas.

When applicable, companies have adapted their long-term incentive plans to reflect modern metrics, such as progress toward ESG goals. The broader vision, of course, is to bring board compensation strategies into alignment with the measurable performance of the board itself. 

Such demands may lead to boards devoting greater attention to finding candidates with skills and experience in reaching specific goals. While this is certainly a present priority, compensation trends may drive boards to search for outliers from their immediate industries or geographic peer groups to find the perfect match. 

The Future of Board Compensation

As boards move toward greater transparency, the public will likely take a greater interest in the ethics surrounding corporate governance and compensation. While most companies aren’t offering enormous compensation packages, they may still need to demonstrate the value of their board members to justify whatever compensation packages they provide them.

What’s left is something of a balancing act. On the one hand, board compensation is designed to both incentivize and reward service at this high leadership level. But that demands total transparency to ensure external stakeholders also recognize the value of these individuals and the way they keep companies moving forward.