Pay Gap Reversal at Board Level: Women Directors Outearn Men!

A new gender gap has emerged.  While still a minority in corporate boardrooms, a new study shows that female directors earn more than their male counterparts.

In the recently published version of its Annual Director Pay Survey, which covers more than 25,000 directors at over 3,200 companies, The Corporate Library reports median total compensation for female corporate directors of $120,000.  That's about $15,000 higher than the median earnings for male directors, which is $104,375.

In a Business Week article about the study, Paul Hodgson, the senior research associate who authored the survey, shares his thoughts on the cause(s) of the earnings gap:

Hodgson theorizes that boards, eager to get female representation across the board, assign more women to multiple committees, earning them extra fees.  He also says the pay differential appears most among smaller companies, where good governance practices, which include concerns about getting diverse input on several committees, tend to be better.

Is there a lesson here?  Yes, and it is the enduring one about supply and demand and the impact they have upon pay.  There's no straighter path to higher earnings than becoming a scarce and highly sought after resource!

Board Compensation Trends: Non-Employee Director Pay Up 10%

According to a recent analysis of board compensation by Equilar, Inc.. detailed in their May 2007 newsletter, non-employee director total compensation at Fortune 500 companies increased 10% from 2005 to 2006, reaching a median annual amount of $165,000.  (For the purposes of this analysis, Equilar defines total compensation as the sum of annual retainers and board meeting fees, excluding any committee fees.)

More findings on overall board compensation:

• The median value of annual retainers paid in cash was $50,000, remaining flat from 2005 to 2006.
• The median value of annual retainers paid in equity increased 8% to $100,000 in 2006.
• The median value of aggregate board meeting fees increased less than 1% to $12,900 in 2006.
• Beyond compensation, the analysis also found that the median number of Board meetings held annually increased from 7 to 8.

And Audit committees:

• Median per-meeting (of the Audit committee) fee remained unchanged at $1,500.
• Median annual retainer for Audit committee members increased 21% to $10,000 in 2006.
• Beyond compensation, the analysis also showed that the median number of Audit committee meetings per year stayed fixed at 9.

And Compensation committees:

• Median per-meeting (of the Compensation committee) fee stayed constant at $1,500.
• Median annual retainer for Compensation committee members increased 4% to $6,250 in 2006.
• Beyond compensation, the analysis also showed that the median number of Audit committee meetings per year remained steady 6.

Director Compensation Continues to Rise

A number of factors are converging to fuel a rise in director compensation, including a grow in the demand for qualified directors at the same time that the qualified pool of candidates is shrinking (due to increasing requirements for expertise and restrictions on the number of directorships that individuals may hold).  An article in Hay Group's recent 2007 (Volume 1) newsletter highlights changes in director compensation based on an analysis of 2006 proxy filings for S&P 500 companies.  According to Hay's findings, the median value of director compensation among this group of companies increased 19% from 2005 filings (a figure, however, which does not account for changes in the sample or the effects of a bull market on equity pay). 

Select details from Hay's findings regarding the different elements of Director compensation are summarized below.  Note that the most significant changes are increases to the audit and compensation committee chair retainers.

• Annual retainer (cash & equity)
  • Median annual value:  $60,000
  • Median percent change in value:  33%
• Meeting attendance fees - board meetings
  • Median annual value:  $1,625
  • Median percent change in value:  N/A
• Meeting attendance fees - audit committee
  • Median annual value:  $1,500
  • Median percent change in value:  N/A
• Meeting attendance fees - compensation committee
  • Median annual value:  $1,500
  • Median percent change in value:  N/A
• Equity compensation - stock options
  • Median annual value: $93,200
  • Median percent change in value:  -5%
• Equity compensation - full value shares
  • Median annual value:  $80,000
  • Median percent change in value:  28%
• Additional chair compensation (retainer) - nonemployee board chair
  • Median annual value:  $120,000
  • Median percent change in value:  42%
• Additional chair compensation (retainer) - lead independent director
  • Median annual value:  $20,000
  • Median percent change in value:  15%
• Additional chair compensation (retainer) - audit committee chair
  • Median annual value:  $15,000
  • Median percent change in value:  75%
• Additional chair compensation (retainer) - compensation committee chair
  • Median annual value:  $10,000
  • Median percent change in value:  100%
• Total director compensation (includes cash, equity plus meeting fees)
  • Median annual value:  $207,500
  • Median percent change in value:  19%

Summary Available for Updated SEC Compensation Disclosure Rules

The SEC recently published a number of changes to its newly adopted executive and director compensation disclosure requirements.  Equilar has published a complimentary summary (registration required) of the key changes outlined in the SEC's December 2006 release which provides an overview of the SEC’s complete set of new executive and director compensation disclosure requirements.

Lead Director and Non-Executive Board Chair Pay

As companies and their Boards have worked to reform governance practices, more corporations are moving to establish independent leadership by electing either a Non-Executive Chair or a Lead Director.  An article in Equilar's January Newsletter highlights the results of a recent study examining the proxies of 443 public Fortune 500 companies to determine the prevalence of independent leadership and pay premiums.

Highlights from the study:

• In 2005, 76.1% of the companies studied disclosed the presence of either a Non-Executive Chair or a Lead Director, as compared to 70.8% in 2004.
• In 2005, among those companies with an independent Board leadership position, 22.3% had a Non-Executive Chair and 81.3% had at least one Lead Director.
• Among those companies disclosing the presence of a Non-Executive Chair, 72.0% paid a premium for service in this position in 2005 versus 65.6% in 2004.
• Pay premiums appear to be less prevalent for Lead Directors.  Among those companies disclosing the presence of a Lead Director, 38.0% paid a premium for service in this position in 2005 versus 28.8% in 2004.
• In 2005, median total compensation for a regular member of the Board was $150,000, for a Non-Executive Chairs was $219,765, and for Lead Directors was $162,424.

Board Compensation Continues to Rise

In its just released report on Directors Compensation and Board Practices in 2006 which covers director compensation in 402 companies, The Conference Board reports that median total compensation for outside (non-employee) directors of U.S. boards is higher than last year in all major industry sectors covered by the study.

According to Charles Peck, compensation specialist at The Conference Board:

Demands on board members have increased markedly in recent years, and their compensation is increasing commensurately.  In particular, committee service, especially for those serving on audit and compensation committees, has become much more demanding.

Among the study's key findings:

In manufacturing, median total compensation (which includes fees, retainers, committee pay, and all forms of stock compensation) for outside directors is now $109,000, up from $91,250 in 2005. The service sector is $106,250 this year, up from $81,875 last year. Financial services increased from $64,500 in 2005 to $83,000.

Median basic annual compensation (the mix of fees and retainers for board service plus committee pay) is up in all three industry sectors. Manufacturing increased from $59,150 to $65,000; financial services increased from $48,000 to $50,300; and services from $57,000 to $60,500.

Learn more about the study here.

Proxy Examples Available for Compliance with New SEC Disclosure Rules

The Security and Exchange Commission's (SEC's) new rules on executive and board compensation disclosure will become effective in 2007 for companies with fiscal years ending on or before December 15, 2006.  To help companies meet the new disclosure requirements, Equilar has released its 2006 Proxy Disclosure Examples Report, which contains actual examples from recent proxy filings that comply or closely align with the new rules.

Free Summary Report on New SEC Executive & Director Compensation Disclosure Rules

To assist its clients in developing a better understanding of the executive and board compensation disclosure regulations adopted on July 26, Equilar (www.equilar.com), a compensation research firm, has published a new report titled:  Summary of the Final SEC Rules on Executive and Director Compensation Disclosure.

The report presents a summary outline and blueprint of the key compensation-related features of the rules.

To obtain a free copy of the report click here.

Dividing Up Company Equity in Startups

From VIEWPOINT in the August 14 edition of BusinessWeek Online, in "Bootstrap Report", author David E. Gumpert describes advice shared in response to a query on the Harvard Startups email list seeking "suggestions on the equity split between founders, directors, advisors, and an option pool". 

Among the suggestions offered by venture capitalists, lawyers and entrepreneurs:

Don't be afraid to divide equity unequally among founders, depending on their experience and expected contributions.  "If you have a very experienced entrepreneur, for example, that person might receive substantially more than other inexperienced people at the same level, because investors like to invest in experienced people," stated one respondent.  If everyone is fairly inexperienced, then a more equal division is appropriate.

Set aside about 20% of stock for employee options and allot 5% to 10% of stock for advisors and directors.  Each member of an advisory board can be granted 0.5%.  All such stock should vest in two to five years, and founders should consider buy-back provisions for people who depart.

Anticipate the founders being diluted substantially by an angel and initial venture capital round, likely winding up with 20% or less of the company (vs. 50% or more for investors).

Above all, capture everything in writing as early in the process as possible, and use an experienced lawyer to get the paperwork right.

Click here to link directly to the article.

Growth in Board of Director Compensation Slows

Board of director pay climbed sharply in the aftermath of Sarbanes Oxley and the increased responsibilities and risks that it created for board members; however, it appears to be slowing to a more modest level of growth according to a new study from Mercer HR Consulting (www.mercerhr.com).

The Mercer study, which is based on a proxy analysis covering 350 publicly traded U.S. companies, found that median total direct compensation (pay for board and committee service plus any equity grants) for board members increased 6.1% in 2005 to $164,637.  This increase, though admittedly healthy, stands in contrast to the more significant jump of 17.8% from 2003 to 2004.

Other key findings from the Mercer study:

• Stock option grants to board members continue to decrease; 53% received grants in 2005 versus 59% in 2004 and 66% in 2003.
• In contrast to stock option activity, full value equity awards (typically restricted stock) are increasing in prevalence; 63% of board members received an award in 2005 versus 58% in 2004.
• Premiums for audit and compensation committee chairs reflect the greater responsibilities associated with these roles; among companies that reported pay levels for these positions, 73% pay the audit committee chair a premium over other committee chairs, and 23% do this for the compensation committee chair.