Vice Chairman, Executive Pay & Governance
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Committee Pay: Small Changes, Big Impact
The changes are in most cases fairly subtle. The impact—and potential controversy—are a different story.
Over the last year, many firms have been tweaking how they pay board directors, from changing equity components to adding member retainers to paying premiums for board- and committee-leadership roles. It’s all aimed at addressing the extra responsibility and risk certain board committees have been taking on in recent years to keep up with regulatory changes, address sector turmoil, or conduct due diligence for an M&A transaction, among other duties. In many cases, some directors “are doing double and triple duty,” says Kevin Murphy, Chair of Finance at USC.
But the changes are creating disparities in pay among various committees at a time of intense public scrutiny of director pay compensation. “Some boards are comfortable with that differentiation, some aren’t,” says Irv Becker, vice chairman of the executive pay and governance practice at Korn Ferry. “Some take the approach that we are all in this together and we shouldn’t differentiate amongst the full board.”
In one small change, some boards have started awarding modest retainer fees to committee members for their work. More impactful, however, has been the shift in the equity component of director pay. According to a recent study, more than 70 percent of Russell 2000 companies now utilize restricted stock units instead of stock options. The former ensures directors receive some equity value; the latter provides it only if the company’s share price increases. Though minor, experts say market volatility and industry activity has enriched some directors more than others.
According to a Grant Thorton analysis of 1500 Russell 2000 companies that have filed proxy statements so far this year, independent directors on the board of healthcare companies earned a median of $241,000 versus $113,000 for those on the boards of financial services firms. Company size and industry account for some of the difference, but changes in equity compensation and market performance do too. The regional banking crisis hit share prices of financial services firms hard in the beginning of the year, for instance. Overall, Russell 2000 firms earned median pay of $200,500 last year.
Michelle Lowry, professor of finance and a corporate governance expert at Drexel University, worries about the unintended consequences of such so-called “customized” pay. “The concern isn’t so much the dollar amount, but the signal it conveys that some directors are worth more than others,” she says. Lowry also says the pay differences could create “pushback from activists” who are already scrutinizing director pay.
Korn Ferry’s Becker sees customizing pay for different board members as a trend that’s in its earliest stage and will likely be refined over time. He says the trend could help attract scarce director talent as firms makeover their boards to deal with the rise of generative artificial intelligence, geopolitical risk, and other strategic business issues. “Firms are competing to find directors with the experience they need,” he says. “Some are differentiating pay to help attract directors, others want everyone on the board to be more aligned on pay.”
For more information, contact Korn Ferry’s Board and CEO Services practice.