The Science Behind Board Compensation

Posted in Board Development by Jim
04 Sep
The Science Behind Board Compensation

When it comes to compensation for Boards almost anything goes. The variance of the amount of compensation a company gives range from $0 to $500,000+. Not only the amount of money paid annually, also the way boards are compensated.

Here are a few examples showing the range of compensation:

  1. Monthly retainer of $500
  2. Annual payment based upon how much dividend the company gave to the shareholders
  3. Annual retainer, per meeting fee, fee for committee work, annual stock grants and annual use of company products
  4. Annual retainer, cash payment at the end of every meeting and one time use of the company jet

Compensation plans of public companies tend to be similar since they are published in the annual 10Q shareholder document. Private companies tend to vary in the board compensation and other potential benefits. There are published board compensation studies that are good to use as a guideline to what other companies are paying and how they are structuring their board compensation. These are by size of companies and industry segments. Individual studies can be done for a few thousand dollars.

In setting up or reviewing your board compensation plan there are a couple of key things to consider. They are:

  1. Board members time expectation and value of their time.
  2. What are the activities beyond just attending board and committee meetings. There are board meetings preparation time, industry conferences, off-site visits, etc.
  3. The value the company receives from the board member as an individual and the company as a whole.

A good board compensation plan should always be structured to incentivize the board member to be a strong advocate for the stakeholders both in the short term and long term.

A compensation plan that has four components generally can cover over 90% of most circumstances.

  1. Annual/Quarterly retainer to be on the board.
  2. Board/committee meeting fee to incentivize the member to participate.
  3. Financial performance bonus based upon what is important to the company, ie. revenue growth, profitability, dividends, etc.
  4. Company perks to get the board member fully engaged in the company by using their products or attend their events.

Review your board compensation at least every 3-5 years to make sure it aligns with the goals you have for your board. For more information on how Cardinal Board Services can help please call or click here.