Hallmarks of Board of Director Compensation: What to Know Before Pursuing Membership on a Board of Directors

Posted: June 23, 2020

A board of directors is responsible for representing the interests of shareholders in an organization. Publicly traded organizations require Board supervision, and many non-profit and private organizations also employ a board of directors. Directors play key roles in the oversight of management, establishing short and long-term strategies for the organization, and often sanctioning or vetoing difficult decisions. Retired executives often elect to serve as Directors when such membership entails flexibility with respect to time commitments and other obligations. Directors are typically paid a retainer, as well as fees, for billable events such as meeting attendance. In 2017, manufacturing giant Applied Materials paid each of its ten board members an annual retainer of $70,000 in addition to fees of $2,000 for each meeting attended. Directors were also paid additional annual retainers for serving on specific committees, i.e. $25,000 for participation in the audit committee. Board members are typically compensated for travel expenses incurred for participation in board meetings. Board member compensation is contingent upon the size and nature of the organization. A 2019 survey of 319 private companies worldwide across 33 different industries revealed a median total compensation of $41,500 for directors. In the realm of publicly traded companies, board member compensation may far exceed that figure. Board of director compensation for publicly-traded companies often includes stock awards and other award-based incentives. These incentives can vary substantially depending on the valuation of the organization. In 2014, Roy P. Vagelos, a former executive of Merck & Co., earned $20.5 million—primarily in the form of stock options—for serving as chairman of the board of Regeneron Pharmaceuticals Inc. Due to concerns about the ethics of offering equity-based compensation to board members, many companies offer deferred compensation plans. This means that directors receive a portion of their compensation in the form of cash retainers or stock units upon completion of their service to the Board. Since this may not be the most practical or desirable compensation plan for board members, Boards may offer alternatives such as payouts of deferred balances in installments of five or ten years. Before agreeing to serve on a board of directors, prospective Directors may consider consulting with an executive compensation consultant to ensure that agreements pertaining to compensation are suitable and clearly delineated. Executives interested in pursuing a Director role can easily research what qualities and qualifications companies are looking for in their board members. Publicly traded companies are required by the SEC to release an annual proxy statement, which not only discloses the compensation of executives and directors, but also often includes details about what the organization values in its board members or seeks in prospective board members. Directors play a key role in driving corporate strategy. Recruiting the best talent for a board of directors can result in significant increases in revenue. Board of director compensation signals how strongly an organization values corporate governance. At a minimum, executives should leverage key knowledge about an organization—obtained from its proxy statement or by means of other research—in order to negotiate the optimal compensation plan for service as a Director. To learn more, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.