Committees tasked with overseeing director compensation are discussing an ISS director pay policy that will take effect in 2020. Under the new policy, boards found to have engaged in a pattern of paying directors excessively without disclosing a compelling rationale for doing so will likely see negative vote recommendations given to the committee members who oversee pay.
The policy is designed to identify outliers, comp consultants say. It roots out comparable individual directors paid at the top 2% to 3% and then seeks to identify whether there has been a pattern of such pay over at least two consecutive years. If a pattern is found, the policy requires a “compelling rationale” for the pay, a definition of which isn’t provided by the proxy advisory firm. This year, ISS flagged companies in reports if directors appeared in the top cohort so boards had at least one year to make adjustments.
As with all ISS policies that could result in adverse vote recommendations for directors in elections, consultants say that boards should be aware of how individual directors measure up, particularly if they could appear in the top percentiles.
“It’s the first year,” says Carol Silverman, a partner in Mercer’s executive law and regulatory group. While consultants have a “fairly good idea” of how the policy will impact boards, there’s an element of not knowing, she says.
“It’s an important policy to understand,” says Yonat Assayag, a partner at ClearBridge Compensation Group.
Directors should have a “good, directional sense” of where they stand, because the repercussions of being viewed as having “excessive compensation” under ISS’s definition could include directors’ receiving a negative vote, she says. Assayag points out that votes in director elections are binding, in contrast to say-on-pay votes, which are non-binding and advisory in nature.
“It does elevate this a bit to a somewhat higher standard, and it should be viewed with that seriousness,” Assayag says. “That being said, if your compensation structure is in line with the market, you really will have nothing to worry about.”
Indeed, Gregg Passin, senior partner and U.S. leader of Mercer’s executive business, says the discussions he has had with clients about the policy have been coupled with conversations about where directors’ pay should be positioned in the general course of board compensation assessments. Every once in a while, says Passin, a board member will question him about raising pay, and his response is always: “Play it conservative, stay at the median of your peer group, look at it periodically and don’t be an outlier.”
“You don’t want an article written about your director pay,” says Passin.
The specter of rising director pay has created more risk to boards broadly and could pose more risk to individual directors if board members see negative votes as a result of director compensation that a proxy advisory firm has deemed excessive.
Still, as the time demands associated with serving as a director have increased and the expectations on board members have expanded, pay has risen and continues to increase.
A Willis Towers Watson report on S&P 500 board pay practices found that 55% of companies made changes to their board comp plans in the most recent fiscal year. Overall, some 50% of boards increased the annual cash retainer, and 59% increased the annual equity grant. The study found that 34% of companies made changes to both cash and equity retainers. The mix of cash and equity on average changed to 60% equity and 40% cash, compared to 59% and 41% last year.
Furthermore, an Equilar report on the largest 500 companies published this month found that median pay for serving on a board has steadily risen since 2014, reaching $260,000 in 2018. Among board chairs, median compensation increased 9% from 2014 to 2018 to $436,000, while lead director compensation rose nearly 20% to $305,000 during the same period.
Compensation consulting firm Frederick W. Cook & Co. revealed in its 2019 director compensation report that median pay on large-cap boards rose 3.9% to $285,000 while median pay on mid-cap boards rose 3.9% to $213,000.
Similarly, Spencer Stuart’s annual board index of S&P 500 companies found that average total compensation for directors on S&P 500 boards increased to an average of $303,269 in 2019, for the first time ever crossing the threshold to above $300,000.
