For the second consecutive year, compensation for outside directors at the nation's largest corporations has increased moderately, an indication that pay for outside directors has returned to an environment of regular, modest pay increases not seen since before the economic crisis, according to an annual analysis by global professional services company Towers Watson (NYSE, NASDAQ: TW). The analysis also found that while overall pay levels were relatively stable, companies continue to refine the design of their director pay packages, presumably in response to internal and external pressures.
The Towers Watson annual analysis of director compensation at Fortune 500 companies found that total compensation for directors in 2011 climbed 5% over 2010 levels. That is on par with the 6% median increase in director compensation in 2010. Much of the increase was fueled by rising levels of stock compensation, reflecting higher stock prices for many U.S. companies last year, as cash-based pay remained relatively flat.
Specifically, the analysis showed the following changes to outside director pay packages:
- Total direct compensation increased in 2011 to a median value of $220,000, up 5% from $210,266 in 2010. Total compensation includes cash pay and annual or recurring stock awards.
- Equity award values rose to $124,986 in 2011, from $114,728 in 2010, a 9% increase.
- Cash compensation increased by almost 4%, from $89,000 in 2010 to $92,500 last year.
- Pay mix consisted of roughly the same mix of compensation as in 2010. More than half (55%) of director pay came from equity in 2011, while 45% was from cash.
"It appears that pay for outside directors has returned to a pattern of more steady increases, and the rate of growth is aligned with what we see in executive total compensation increases," said Doug Friske, global head of executive compensation consulting at Towers Watson. "The demand for strong, talented directors to serve on boards continues to grow, which could, in turn, place upward pressure on how companies compensate their directors in the future. Rising stock prices will also likely contribute to higher director pay values, though declines could stifle any continued growth."
The analysis found a continuing trend to eliminate board and committee meeting fees in favor of fixed retainers for service. In 2011, less than one-third (32%) of companies paid board meeting fees, a sharp decline from 62% in 2004. There was also a decline in companies paying committee meeting fees, from 64% in 2004 to 37% last year.
Among other survey findings:
- 40% of companies separate the roles of CEO and board chair, roughly the same as in 2010. At the median, nonexecutive board chairs received an additional $150,000 in incremental pay above and beyond that provided for regular board service.
- More companies established stock ownership guidelines and retention policies for their director pay programs. In 2011, 87% of companies had either or both types of mandates, up from 83% in 2010. However, the median value of stock ownership required for directors subject to stock ownership guidelines remained unchanged at $300,000 in 2011.
"With directors facing intensifying scrutiny of their performance and effectiveness, companies may feel compelled to reevaluate their director pay structures to ensure that their board members are appropriately compensated," said Friske. "However, major change does not appear on the horizon."
About the Analysis
Towers Watson analyzed the compensation for outside directors at 468 publicly owned Fortune 500 companies that filed their fiscal year 2011 proxy by June 30, 2012. Data for these companies were then compared against the results obtained from an analysis of 464 Fortune 500 companies in 2010.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.