Confusion around Board Compensation for Private Companies
As a provider of Corporate Board Governance & Recruitment Services, the issue of director compensation comes up in every client engagement.
Common questions include:
- Are we aligned with the market on the compensation we are providing for our directors?
- Is there a standard practice to determine compensation?
- What components should make up the board compensation package?
- Will the level of compensation help or hinder us in attracting the best director possible?
- How should we structure the compensation plan?
The answer to where director compensation should be set always seems to be “that depends”.
Public companies have a leg up in benchmarking compensation because they have to report directors’ compensation in their annual report proxy statement. The information is available to the public.
Private companies, however, must work to find out specific compensation information. Compensation reports can be found by doing internet research. Additionally, there are compensation consulting companies that can provide both general information and specific compensation strategies for your company. Organizations that provide compensation data and guidance include:
- National Association of Corporate Directors (you must be a member to obtain the reports)
- Compensation Advisory Partners
- Lodestone Global
- Private Company Director
- Board Effect
- Leading universities. Their law school’s often publish information about corporate governance
The primary director compensation plan components to consider are:
- Annual retainer
- Per meeting fee
- In person
- Committee compensation
The complexities involved in determining how much to pay, as well as how to structure the compensation, revolve around the time commitment, the desired involvement of the director, and the current board compensation that is in place. Changes to board compensation tend to be more evolutionary than revolutionary.
The typical time commitment for private company board service is between 80-100 hours per year, versus 200-225 hours for a public company. This is part of the reason that public company director compensation is approximately 2X that of private companies. The other reasons public companies pay more are due to greater compliance requirements, higher complexity and additional risks associated with public board service.
As professional board consultants, our recommendation is to pay a retainer equal to one half of the total compensation, pay per meeting fees (in person fees higher than virtual) and pay committee meeting fees. If you are open to compensating your directors using equity, that can enhance compensation by incenting directors to add value to the company.To attract top independent director talent, total compensation should range between $25,000 and $100,000 depending on the industry and size of the company.
One final thought. Compensation is not the top reason why executives join boards. Board service provides the opportunity for directors to share their experience, as well as gain new insights and experience from working closely with your company and the other directors on the board.