Board of Directors:
Assuring Total Compensation Reflects Your Critical Accountabilities
What does Board Compensation involve?
Historically board directors have been compensated through a combination of retainer and/or meeting fees and annual or periodic stock option grants. There has been little differentiation between those with leadership and general membership roles. Cash compensation has been set to pay for the activities and services of the board members. Stock option awards have attempted to align shareholder interests with board decisions, and provide competitive total compensation necessary to attract new members.
While board compensation is philosophically similar to executive compensation, there are some fundamental differences. They are similar in that each program includes cash and usually some form of equity based compensation for services rendered. It is different because there is often little differentiation between members, the amount one receives is not based on performance, and there are concerns about inherent conflicts between current pay programs and the fiduciary responsibility of the board.
Why be concerned with Board compensation?
While the overall role and responsibilities of boards have not changed, the work they perform and the consequences they face for their decisions have changed dramatically. The requirements and roles for directors have increased significantly. Investor and shareholder advisory groups are closely scrutinizing the governance practices and how board members are compensated. As part of the re-examination of the corporate governance, the boards of directors need to assess the philosophy, basic architecture, actual amounts and decision process for compensating the directors.
There are three primary areas where the Wilson Group assists boards in determining the appropriate compensation. Our capabilities and services will help the client organization address these issues with information and thoughtful guidance. These areas are:
- Determine the framework for determining the structure, mix and levels of compensation for directors. Should the board be compensated for its activities (i.e., meeting fees) or their responsibilities (i.e., retainers)? Should there be a difference in total compensation for the chair of the committees from others on the board? Should the directors receive equity-based compensation for their services or should they receive only cash compensation? What mix best reflects their service and fiduciary responsibilities to the shareholders and executive management? Should there by any special conditions related to a director’s compensation?
- Determine the frame of reference for the appropriate amount of compensation. What should constitute the “marketplace” from which the corporation needs to draw directors and what is the desired level of competitiveness? Should there be a difference between new members and well-established members; between current shareholders and board members with limited holdings in the company? Should corporate performance impact director compensation, and if so how?
- Provide on-going reviews and support to decisions that fulfill legal, ethical and strategic requirements. Should the current compensation programs be changed in light of the changes evolving with governance requirements, the board structure and membership of the board? How should these changes be implemented and in what timeframe? How often does the board need to examine its own compensation, and how should it make and document these decisions without being seen as self-serving? Should there be a similar process for assessing and providing oversight to the company’s executive compensation programs?
What the Wilson Group offers to Boards?
We work closely with Boards and their outside counsels to assure the total compensation meets the standards of appropriate fairness, ethics and competitiveness. Frequently our engagements include the following specific tasks:
- Comparative information on Board structures and practices including membership, meeting frequency, committee structures and charters, and director roles and accountabilities.
- Cash compensation comparisons with the general market or peer group companies for retainers and meeting fees.
- Equity compensation comparisons in terms of the amount, value, type, timing and vesting provisions.
- Prevalence of benefits and services provided by the corporation to its board members.
- Recommendations, discussion guidance and support to decisions on these areas.
We look forward to the opportunity of working with you and develop the total direct compensation programs that shareholders have confidence in and executive management views as aligned with the strategy and values of the corporation.
Please contact us at 978-371-0476 or at info@wilsongroup.com.
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