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A New Perspective on Director Pay

In an article published at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Jeremy Goldstein, a partner at Wachtell, Lipton, Rosen & Katz, argues that directors' compensation should be reexamined, given the dramatic increase in the demands placed on directors of public companies and the scrutiny of boards' actions.  In essence, Goldstein says that the role of the board has expanded significanly, requiring more and different skills, and therefore competition for the best candidates for directors should be reflected in director pay.

An engaged, skilled and thoughtful board of directors adds immense value to a corporation. It is more difficult than ever to recruit and retain directors who meet the requirements - including the increased legal and regulatory requirements imposed within the past ten years - for experience, expertise, diversity, independence, leadership, collegiality and character. Competition for the best candidates is intense, particularly in view of the fact that the ideal director candidate is often a successful, independent and prominent person who does not need the exposure to the obligations that public company directorship entails.

Goldstein also discusses the way the time committments required of directors, both at and outside of meetings, should also be reflected in the way directors are compensated.  Technology and the demands of the current market environment require greater time committment at more frequent intervals.  

Companies should give careful thought to the mix between individual meeting fees and retainers. Business and regulatory demands have deepened director involvement and technology has changed the way directors meet. In view of this, there has been a de-emphasis of per-meeting fees and a concomitant increase in retainers. This simplifies director pay and avoids issues that arise from electronic forms of communication and frequent, short telephonic meetings. As companies move away from per-meeting fees to retainer structures, they should consider whether additional retainer pay is appropriate for directors serving on committees that impose substantial extra demands. It is also appropriate to consider the level of time commitment required outside of meetings, including for members of audit and compensation committees who must frequently review substantial written material to be properly prepared for their meetings.

The article also makes clear that director compensation issues are unique and different from considerations of employee and executive compensation.  

Although many companies allocate responsibility for setting director pay to the compensation committee, director pay is different from employee compensation and occupies a position of unique importance to the company. It is a fundamental element of corporate governance. It is also a good idea for director compensation to remain analytically and conceptually distinct from the question of executive pay. Companies should consider whether responsibility for director pay is better delegated to the company's corporate governance and nominating committee. In any case, the decision with respect to director compensation should always be subject to overall board of directors review and approval.

Boards, and particularly compensation committees, should bear in mind the new reality of demands on directors when looking at the level and method of board compensation.

The full text of the piece is availalbe at: