October 9, 2018

Director Pay: A Close Look at the Trends

Executive pay gets plenty of attention in the press and from shareholders. Whether it’s the top 10 pay disclosures of the year or the latest severance package of a big company CEO, the story is sure to garner headlines. As if CEO pay isn’t enough, director pay is now starting to grab the attention of investors as well. In this Farient brief, we take a closer look at the trends of director pay and where it might be heading in the future.

It has been well documented by the news media that executive pay has increased steadily over the past decade. Perhaps not as obvious is that director pay has done the same.

In 2017, that number increased to $278,803, an increase of 43%.  Not surprisingly, directors at mid-cap and small-cap companies have been and continue to be paid less than those directors in larger companies. However, the directors in smaller companies have seen their compensation grow at a much faster rate, 67% for the S&P MidCap 400 and 72% for the S&P SmallCap 600, albeit from a smaller base. This may be the result of expectations for director service being raised due to increased responsibility, deeper time commitments, and closer investor scrutiny.

As director pay has increased, the vehicles used to deliver that pay have changed as well. Focusing on the S&P 500, the percentage of companies using options to deliver director pay has declined from 53% in 2008 to only 13% in 2017. This has taken the total amount of director pay delivered as options from 19% to only 6%. All this pay has been moved into full-value shares (restricted stock, restricted stock units). The use of these vehicles increased to 97% in 2017 from 81% in 2008.

Despite the trend away from using options, some sectors have resisted this trend. Although down from 77% in 2008, 32% of companies in the health care sector still used options in 2017 to deliver director pay. More than 50% of companies in the biotechnology and equipment and supplies industry groups use options. This includes such companies as Baxter International, Danaher Corporation and Regeneron Pharmaceuticals who paid their median nonexecutive director $1.3MM in 2017, the highest in the S&P 500.

The Future of Director Pay

Demands on directors continue to increase; they are very much in the hot seat. Upward compensation trends are following the increased scrutiny, accountability and search for talent. At Farient, we see no signs of either of these trends reversing. As companies seek diversity on their boards, they will need to tap different sources of talent and pay a premium for it.

 

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