NEW YORK--(EON: Enhanced Online News)--Fueled by a jump in cash compensation, total pay for outside directors at the nation’s largest corporations increased modestly in 2012, according to an annual analysis by global professional services company Towers Watson (NYSE, NASDAQ: TW). The analysis also showed that companies increased the value of annual retainers and continued to shift away from variable forms of pay, which helped to increase the cash element of directors’ total compensation package.
“While director pay increases in the early years of this decade were primarily driven by rising equity values, last year’s increase was fueled by growth in cash compensation.”
The Towers Watson annual analysis of director compensation at Fortune 500 companies found that total direct compensation for directors increased by 3% at the median last year, from $220,000 in 2011 to $227,000. That is slightly lower than the 5% increase in director total compensation in 2011. Total compensation includes cash pay, and annual or recurring stock awards. Meanwhile, the median value of cash compensation jumped 8% last year, to $100,000, driven primarily by the first increase in the median cash retainer in two years. Compensation from annual and recurring stock awards remained virtually unchanged last year at $125,000, the analysis found.
“Cash retainers are playing a larger role in the compensation mix for outside directors as the majority of companies have now eliminated meeting fees, reflecting the evolution of director roles to 24/7 commitments,” said Doug Friske, global head of executive compensation consulting at Towers Watson. “While director pay increases in the early years of this decade were primarily driven by rising equity values, last year’s increase was fueled by growth in cash compensation.”
According to the analysis, the annual cash board retainer increased by 7% at the median in 2012, rising to an all-time high of $80,000. Continuing the trend of the past several years, companies replaced various types of variable cash pay for directors, such as per-meeting fees for board and committee service, with new or increased retainers. The prevalence of per-meeting fees for board meetings dropped from 32% to 28% over the past year, while the practice of providing meeting fees for committee meetings fell from 37% to just over a third. By comparison, the prevalence of flat cash retainers for committee service increased slightly, while the median committee member cash retainer rose from $7,500 to $8,000.
After increasing nearly 10% at the median in each of the last two years, the median annual stock award provided to directors stayed relatively flat, remaining at approximately $125,000. This represents the slowest yearly growth since the height of the economic crisis in fiscal 2009, when the median annual equity award increased by just 1%.
“The demand for experienced, talented directors to serve on boards remains strong and will likely grow as companies address the retirement of long-standing members and pursue greater member diversity. As a result, we expect companies will continue to evaluate their overall director compensation programs and policies to ensure they are able to attract the best directors to their boards,” said Friske.
Among other survey findings:
- While the median annual equity award value did not increase in 2012, equity remains a significant portion of the pay program for directors of most companies. The average pay mix for Fortune 500 directors remains 45% cash and 55% equity.
- Stock ownership guidelines and stock retention policies for director pay programs have been adopted by most companies. In 2012, 89% of companies had either or both types of mandates, up from 87% in 2011. The median value of stock ownership required for directors subject to stock ownership guidelines increased from $300,000 in 2011 to $350,000 in 2012.
- Since the Delaware Chancery Court’s ruling last year in Seinfeld v. Slager, a growing number of companies have adopted limits on the size of grants that can be awarded to directors under new or amended equity plans. Over a fifth (22%) of the Fortune 500 companies that adopted or amended stock plans in the past year added a director-specific annual grant limit.
About the Analysis
Towers Watson analyzed the compensation for outside directors at 469 publicly owned Fortune 500 companies that filed their fiscal year 2012 proxy statements by June 30, 2013. Data for these companies were then compared against the results of an analysis of 468 Fortune 500 companies in 2011.
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.