2013 S&P 500 Total Board Cost Study
Steven Hall & Partners recently completed a study of Total Board Cost among companies listed in the S&P 500 index. Total Board Cost (“TBC”) equals the sum of directors’ cash, equity, pension value changes, and all other compensation amounts as reported in the director compensation table within the most recent proxy statement. The study includes all paid directors during a given reporting year, with certain exclusions for fees paid for duties unrelated to board service.
This study serves as a supplement to our eighth annual Director Compensation Study, which was released in September 2013 and focused on individual director compensation amounts. Analyzing TBC provides companies with another perspective on director compensation as they review and contemplate changes to their current programs.
Among companies in the S&P 500 we found:
- Median Total Board Cost equaled $2,433,139
- Median number of paid directors was ten
- 55% of total director compensation was delivered in equity
Key observations with respect to analyzing the median values of data by study participant revenue, market capitalization and GICS sectors:
- TBC and Average Cost per Director (“ACD”) were positively correlated with increases in revenue and market capitalization across the studied companies
- Energy Sector had the highest TBC and ACD among all ten GICS sectors
- Information Technology Sector delivered the highest percentage of director pay in equity (64%), while the Materials Sector delivered the highest percentage of director pay in cash (47%)
Criteria for Selecting Companies
This study examined the Total Board Cost disclosed by companies listed in the S&P 500 as of November 2013. Two companies that were spun-off in 2013 and consequently did not have adequate disclosure related to board cost were excluded from our analysis.
The study compared and contrasted Total Board Cost and Average Cost per Director among the revenue and market capitalization ranges illustrated below in order to observe the effect company size had on these amounts.
All ten sectors in the Global Industry Classification Standard (GICS) were represented within the study sample as detailed below.
Total Board Cost
Among the S&P 500, we found the number of paid directors ranged from three to 29 with the median equaling ten. TBC for the S&P 500 ranged from $34,000 to $8.1 million with a median value of $2,433,139 and an average of $2,503,875.
TBC reflects the sum of all four fee components (cash, equity, pension value changes, and all other compensation amounts), as reported in the director compensation table of the most recent proxy statement. Fees paid to all directors were reviewed in the study, including those paid to directors who did not serve the entire year. Certain exclusions were made for fees paid for duties unrelated to board service, such as consulting fees and payments made pursuant to previous employment by the company.
Directors continue to be one of the best buys in corporate America. As shown below, the median total compensation for S&P 500 CEOs was $10.4 million compared to a TBC of $2.4 million for the services of ten paid directors (S&P 500 median). This difference in cost illustrates how companies are getting the business experience and perspective of ten highly accomplished individuals for less than one-quarter of the cost of one CEO.
Finally, we compared TBC to revenue and market capitalization amounts to show the minimal financial impact director fees have on companies. At median, TBC equals 0.03% of revenue and 0.02% of market capitalization.
Total Board Cost versus Number of Paid Directors
The number of directors sitting on a board greatly influences TBC. The scatter plot below shows the relationship between number of paid directors and TBC.
Total Board Cost by Financial Segment & GICS Sector
Size of the organization continues to be an important factor in TBC. Higher TBC amounts at larger companies are the result of these organizations paying both higher fees and having more directors than smaller companies. As we discuss below, the Average Cost per Director also increases as the size of the organization increases. Median number of paid directors ranged from nine to eleven for all financial and GICS sector groupings displayed below.
While industry still influences director fees, the differences between industries has decreased over the last several years as competition for quality directors pressured companies in the historically lower paying industries, such as utilities, to raise their fees.
Average Cost per Director
ACD reflects a company’s TBC divided by the number of paid directors. ACD for the S&P 500 ranged from $3,400 to $674,873 with a median value of $234,639 and an average of $248,928.
Average Cost per Director versus Number of Paid Directors
Among the S&P500, ACD is negatively correlated with the number of paid directors. In our experience, boards do not hold more meetings or have more standing committees simply because they have more paid directors. Therefore, directors on smaller boards are more likely to chair or be a member of a committee than directors on larger boards, which increases the average cost per director.
Average Cost per Director by Financial Segment & GICS Sector
As mentioned above, while the size of the organization continues to be an important factor in both TBC and ACD, there is less differentiation in director fees between industries than observed in the past.
Among the S&P 500, the majority of director compensation was provided in the form of equity (55%), followed by cash (40%), all other compensation (4%), and changes in pension value (1%). Among the 498 companies studied, 74% paid more than half of all director fees in the form of equity.
In recent years, we have noticed an increased focus on pay mix by clients as they consider changes to their director compensation programs. When boards make changes to director pay levels, particular attention is paid to maintaining or increasing the percentage of total compensation paid in the form of equity. Maintaining the equity percentage has also become easier to accomplish as more companies are awarding equity based on grant date dollar value instead of granting a fixed number of shares. This reduces the year over year volatility in equity values and provides more control over pay mix.
Pay Mix by Financial Segment & GICS Sector
Equity comprised at least half of average director pay across all financial segments and GICS sectors, followed by cash and all other compensation. Change in pension value was either the smallest component of total director compensation or non-existent across all groups.
We note that equity slightly decreased as a percent of total compensation in larger companies, in favor of a higher percentage in cash and all other compensation.
Information Technology companies delivered the highest percentage of director pay in equity (64%), while companies in the Materials Sector delivered the highest percentage of director pay in cash (47%).
Thoughts for Consideration
As it comes time for your company to conduct its annual review of director compensation, we recommend you consider the following general questions:
- Is your director compensation program competitive?
- Does it allow you to attract and retain high quality director candidates?
- Are modifications to your director compensation program sustainable, appropriate and reflective of projected market increases and company growth?
- How does your director pay mix compare to the pay mix at companies of similar size and/or industry?
- Is your program’s structure aligned with the current best practice of delivering at least half of total value to directors in the form of equity?
- If your program’s equity awards are denominated in shares, does your company account for the total potential volatility in grant value?
- To what degree does your company consider Total Board Cost when making modifications to your director compensation program?
As always, we welcome the opportunity to further discuss this study or any specific comments or questions you may have regarding your current or contemplated program.
About Steven Hall & Partners
Steven Hall & Partners is an independent compensation consulting firm, specializing exclusively in the areas of executive compensation, board compensation, non-profit compensation and related governance issues. By focusing solely on this critical and complex segment of the human resources arena, we are able to provide our clients with the highest quality expertise and best counsel available on a practical basis. For more information, please visit www.shallpartners.com and follow us on Twitter @SHallPartners.
Contacting Steven Hall & Partners
This publication is provided by Steven Hall & Partners as a service to clients and colleagues. The information contained in this publication should not be construed as legal, tax or accounting advice. We can assist with the development and/or modification of director compensation programs and related corporate governance policies. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Kathie Mulroe (212.488.5400; firstname.lastname@example.org).