Compensation for directors continues its slow and steady upward creep, but not everything is expected to be business as usual over the next couple of years.
The 2017–2018 Director Compensation Report—the 19th annual report on board pay authored by the compensation consulting firm Pearl Meyer and published by the National Association of Corporate Directors (NACD)—finds small pay increases and notable changes in the operating environment that could have a trickle-down effect on director pay in the near future.
Growth Across All Company Sizes
The report’s authors analyzed director pay information found in proxy statements or other financial disclosures filed with the U.S. Securities and Exchange Commission for fiscal years ending between Feb. 1, 2016, and Jan. 31, 2017. In all, Pearl Meyer analyzed data from 1,400 companies across 24 industries.
Across all companies included in the analysis, median director pay increased a modest 4 percent over the prior reporting year. Looking at companies by market capitalization, the smallest increases went to directors of micro-sized companies (those with revenues ranging from $50 million to $500 million), where median pay grew just 2 percent, from $120,286 to $123,230 (see Figure 1).
Small and medium-sized companies tied for the largest year-over-year median pay increases at 6 percent. That brought director pay up to $166,278 at small companies (those with revenues between $500 million and $1 billion), and to $192,250 at medium- sized ones (those with revenues between $1 billion and $2.5 billion). The low- to mid-single-digit increases in median director pay have been fairly consistent over the past six years, according to the report.
Committee Service and Pay
Most companies continue to provide additional compensation to directors for their committee membership. As is consistent with previous years’ data, members of the audit committee—which has a median of seven meetings annually, the highest of any committee—garner more than members of any other committee, no matter the company size (see Figure 2).
Fees paid to audit committee members could increase in the next couple of years, according to the report. The committee’s already high workload could increase as companies navigate the financial ramifications of the new tax law.
The New Tax Law and a Changing Environment
The Tax Cuts and Jobs Act of 2017, introduced by congressional Republicans late last year and signed into law by President Donald J. Trump, is having wide-ranging effects on businesses. Board pay programs are likely to change as a result of the law, the report states.
This is particularly true when it comes to the practice of deferring director fees. Deferral of compensation that gets paid out in the form of director fees has, over time, become something of a signal of good governance. Delaying payouts is seen as helping align directors’ interests with the long-term interests of shareholders. The practice was meant to provide potential tax relief to directors who were, at the time of their board service, employed full time: by deferring their director pay until after retirement, they could presumably take advantage of lower post-retirement tax rates.
Enter the new tax law. Under the law, personal income taxes will decrease for upper-income levels. That means deferring director fees until later to enjoy lower tax rates on those fees may be less enticing.
For more information about the latest director compensation practices, read the full article about the compensation report in NACD Directorship magazine. The full 2017–2018 Director Compensation Report is available to NACD members at NACDonline.org/directorcomp. Information about joining NACD is available here. A supplemental publication, Director Compensation: Summary Statistics, provides additional compensation data and is available at PearlMeyer.com