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TRENDS IN DIRECTOR COMPENSATION AND
RELATED GOVERNANCE STUDY
2
INTRODUCTION
• Director compensation has not historically been an area of public scrutiny, but this is changing– Negative media coverage on high director pay levels observed
beginning in the 2013 proxy season • Questions regarding amount and value of services actually
provided by directors– Shareholders and shareholder advisory firms have also taken a
greater interest• ISS has begun to assess director compensation on a
relative basis• Emerging governance issues such as tenure and diversity
– Shareholder derivative lawsuits focused on director compensation, particularly the limits on compensation implied in shareholder approved equity plans• Suggests need for “meaningful” limits on director
compensation to preserve protection under the business judgement rule
3
INTRODUCTION
• Annual reviews of director compensation becoming more common– Ensures more modest movements to maintain desired
marketplace positioning– May be more important if scrutiny of director pay levels
continues
4
• Top 200 – 200 largest US public
companies based on fiscal 2014 revenues
• Revenues– Ranges from $15B - $486B– Median equals $27B
• GICS Sectors– All 10 GICS Sectors
represented
2015 DIRECTOR COMPENSATION STUDYSTUDY SAMPLE
$15B - $17.5B17%
$17.5B - $25B29%
$25B - $50B27%
$50B - $100B16%
$100B -$486B11%
Revenues
5
2015 DIRECTOR COMPENSATION STUDYMETHODOLOGY
Straw Director Description of Roles
Audit Committee Chair •Chair of audit •Member of one other committee
Compensation Committee Chair •Chair of compensation•Member of one other committee
Nominating/Governance Committee Chair •Chair of nominating/governance•Member of one other committee
Non-Chair •Member of two committees•Chair of none
Average Director •Chair of one committee•Member of one other committee
6
2015 DIRECTOR COMPENSATION STUDYTOTAL COMPENSATION – AVERAGE DIRECTOR
2009$232,083
2010$240,417
2011$250,000
2012$261,333
2013$268,333
2014$276,667
$200,000
$225,000
$250,000
$275,000
$300,000
Changes in Average Director Median Total Compensation Values, 2009 - 2014
+3.1% vs. '13+19.2% vs. '09
7
2015 DIRECTOR COMPENSATION STUDYTOTAL COMPENSATION – BY POSITION
(+3.1% vs. '13)(+19.2% vs. '09)
Average Director
Audit Chair Compensation Chair
Nominating/Governance
Chair
Non-Chair $200,000
$225,000
$250,000
$275,000
$300,000
2009$232,083
2009$236,250 2009
$231,250 2009
$230,000
2009$220,000
2014$276,667
2014$280,000 2014
$276,500 2014$272,250
2014$260,000
Changes in Median Total Compensation Values, 2009 - 2014
8
2015 DIRECTOR COMPENSATION STUDYTOTAL COMPENSATION – BY REVENUE• Director compensation continues to be correlated to revenue size
of the company– Smaller companies pay less overall than their larger
counterparts– Compensation increases have been greatest among the
smaller companies over the last five years• +24% for companies with revenues < $17.5 billion• +13% for companies with revenues > $100 billion
2009 20092009
2009 20092014 20142014
20142014
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
$320,000
< $17.5B $17.5B - $25B $25B - $50B $50B - $100B > $100B
Median Compensation - Average DirectorBy Revenue Range
9
2015 DIRECTOR COMPENSATION STUDYTOTAL COMPENSATION – GICS SECTOR• Utility, information technology and consumer discretionary
companies experienced the greatest increases over the past five years, with growth rates of +26%, +25% and +23% respectively
2009
2009
2009
2009 20092009
2009
2009
2009
2009
20142014
2014
20142014
2014
2014
20142014
2014
$195,000
$220,000
$245,000
$270,000
$295,000
$320,000
Median Compensation - Average DirectorBy GICS Sector
10
• Equity continues to increase as a percent of total director pay• Over half of total compensation in the form of equity
– Consistent with best practices
2015 DIRECTOR COMPENSATION STUDY PAY MIX
2009
2014
Cash48%
Cash43%
Equity52%
Equity57%
Average Director Pay Mix, Cash vs. Equity2009 - 2014
11
• Median cash retainer for board service equals $100,000 in 2014 – +11% increase over 2013– +33% increase over 2009– Increases in annual cash retainers have outpaced those
observed in total compensation due largely to the elimination of meeting fee payments
• 99% prevalence among Top 200
2015 DIRECTOR COMPENSATION STUDY CASH RETAINER
$75,000
$75,000
$80,000
$85,000
$90,000
$100,000
$70,000 $75,000 $80,000 $85,000 $90,000 $95,000 $100,000 $105,000
2009
2010
2011
2012
2013
2014
Median Cash Retainer Values2009 - 2014
Yrs Growth
1 +11%
2 +18%
3 +25%
4 +33%
5 +33%
12
• Median equity retainer value equals $150,000 in 2014– +7% increase over 2013 – +25% increase over 2009– 50% greater than the board cash retainer
• 97% prevalence among Top 200
2015 DIRECTOR COMPENSATION STUDY EQUITY RETAINER
$120,000
$125,000
$130,000
$140,000
$140,000
$150,000
$115,000 $120,000 $125,000 $130,000 $135,000 $140,000 $145,000 $150,000 $155,000
2009
2010
2011
2012
2013
2014
Median Equity Retainer Values2009 - 2014
Yrs Growth
1 +7%
2 +7%
3 +15%
4 +20%
5 +25%
13
• Stock options continue to decline in prevalence • Full value awards have become nearly universal• Equity awards predominately denominated in dollars as opposed to
shares
2015 DIRECTOR COMPENSATION STUDY EQUITY RETAINER – GRANT PRACTICES
73%
81%
84%
88%
91%
92%
20%
14%
12%
9%
5%
6%
7%
5%
4%
3%
4%
2%
2009
2010
2011
2012
2013
2014
Equity Grant Practices2009 - 2014
Full Value Awards Only Both Options Only
14
• Over 80% of 2014 equity awards vest either immediately or within one year of grant
• Continue to observe a notable and consistent minority of companies that grant equity awards with multi-year ratable vesting
2015 DIRECTOR COMPENSATION STUDY EQUITY RETAINER – VESTING
48%
46%
29%
36%
23%
18%
2009
2014
Equity Vesting Schedule Prevalence, 2009 - 2014
Immediate One-Year Multi-Year
15
2015 DIRECTOR COMPENSATION STUDY BOARD MEETING FEES
2012
• Board meeting fees continue to decline in prevalence– 15% of Top 200 pay fees for each meeting– 6% pay fees for meetings held in excess of a predetermined
number of meetings• Median meeting fee equals $2,000
No Meeting Fees79%
Excess Mtgs. Only
6%
All Meetings
15%
2014
2009 2010 2011 2012 2013 2014
Mtg. Fee $2,000 $2,000 $2,000 $2,000 $2,000 $2,000
Prevalence 36% 32% 31% 27% 24% 21%
20%
25%
30%
35%
40%
45%
$0
$500
$1,000
$1,500
$2,000
$2,500
Board Meeting Fees, Median Values and Prevalence2009 - 2014
16
2015 DIRECTOR COMPENSATION STUDY COMMITTEE MEETING FEES
2012
• Committee meeting fees are slightly more prevalent than board meeting fees
20%
30%
40%
50%
$0
$1,000
$2,000
$3,000
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Audit Compensation Nom/Gov
Committee Meeting Fees, Median Values and Prevalence2009 - 2014
Prevalence
77%
77%
78%
18%
18%
17%
5%
5%
5%
Audit
Compensation
Nom/Gov
2014 Committee Meeting Fee Prevalence
No Meeting Fees All Meetings Excess Mtgs. Only
17
2015 DIRECTOR COMPENSATION STUDYCOMMITTEE CHAIR FEES
Retainer Only71.6%
Both21.8%
Meeting Fees Only0.5%
None6.1%
Nom/Gov
Retainer Only73.4%
Both22.6%
Meeting Fees Only0.5%
None3.5%
Compensation
Retainer Only74.5%
Both22.5%
Meeting Fees Only0.5%
None2.5%
Audit
$25,000
$20,000
$15,000
Audit Compensation Nom/Gov
2014 Median Committee Chair Additional Fees
18
2015 DIRECTOR COMPENSATION STUDY COMMITTEE MEMBER FEES
Retainer Only35%
Both6%
Meeting Fees Only17%
None42%
Audit
Retainer Only21%
Both3%
Meeting Fees Only19%
None57%
Nom/Gov
Retainer Only23%
Both4%
Meeting Fees Only19%
None54%
Compensation
$14,900
$10,000 $9,000
Audit Compensation Nom/Gov
2014 Median Committee Member Additional Fees
19
2015 DIRECTOR COMPENSATION STUDYCHAIR OF THE BOARD• 25% of boards in the Top 200 are led by a non-executive
chairperson• 94% of non-executive chairs receive additional compensation for
the role in 2014
CEO & COB63%
Employee COB12%
Non-Exec COB25%
Top 200 COB Prevelance
Cash Only43%
Cash & Equity41%
No Retainer6%
Equity Only10%
Non-Exec COB Retainer
20
2015 DIRECTOR COMPENSATION STUDYCHAIR OF THE BOARD• Median additional compensation for non-executive chairs equals
$200,000– No change since 2011– Equals 73% of total compensation for the average director
2009 2010 2011 2012 2013 2014
COB Add'l Pay $167,500 $179,750 $200,000 $200,000 $200,000 $200,000As % of Avg.
Director Total Comp. 71% 75% 81% 78% 76% 73%
55%
65%
75%
85%
$150,000
$175,000
$200,000
Non-Executive Chairperson Premium Median Values and As % of Average Director Total Compensation
2009 - 2014
21
2015 DIRECTOR COMPENSATION STUDYLEAD DIRECTOR• A majority of the Top 200 (73%) have an annually-elected
lead/presiding director• 85% of lead/presiding directors receive additional compensation
for the role in 2014
Lead Director
60%
None24%
Rotating / Assigned
3%Presiding Director
13%
Lead / Presiding Prevelance
Cash Only78%
No Retainer15%
Cash & Equity
4%
Equity Only3%
Lead / Presiding Retainer
22
2015 DIRECTOR COMPENSATION STUDYLEAD DIRECTOR• Median additional compensation for lead/presiding directors
equals $27,500– Increased +$2,500 over 2013 level– Equals 10% of total compensation for the average director
2009 2010 2011 2012 2013 2014
Lead Add'l Pay $25,000 $25,000 $25,000 $25,000 $25,000 $27,500As % of Avg.
Director Total Comp. 11% 10% 10% 9% 9% 10%
0%
5%
10%
15%
$15,000
$20,000
$25,000
$30,000
Lead and Presiding Director Premium Median Values and As % of Average Director Total Compensation
2009 - 2014
23
• Ownership guidelines for directors continue to increase in prevalence for companies in the Top 200
• Only 6% of the Top 200 do not disclose a share ownership guideline for directors
2015 DIRECTOR COMPENSATION STUDY SHARE OWNERSHIP GUIDELINES
83%
87%
89%
91%
90%
94%
17%
13%
11%
9%
10%
6%
2009
2010
2011
2012
2013
2014
Prevalence of Share Ownership and Retention Guidelines2009 - 2014
Guideline No Guideline
24
• Majority of ownership guidelines stipulated as a multiple of the annual board cash retainer (68% of companies)– 5x cash retainer is most
common requirement• Value of guidelines ranges
from $100,000 to $2,077,000– Median equals
$500,000
2015 DIRECTOR COMPENSATION STUDY SHARE OWNERSHIP GUIDELINES
Multiple of Cash Retainer
68%
Multiple of Equity
Retainer5%
Multiple of Cash & Equity
Retainers3%
Multiple of Total Remun.
1%# of Shares9%
Retention Value7%
Retention %7%
2014 Share Ownership and Retention Guideline Definitions
25
• Total board cost reflects the sum of all four fee components– Cash, equity, pension value changes and all other compensation
amounts• Among the Top 200 in 2014
– The number of paid directors ranges from one to 17 • Median equals eleven
– Total board cost ranges from $43,900 to $6.1 million • Median equals $2.9 million
– +5% over 2013 levels
2015 DIRECTOR COMPENSATION STUDY TOTAL BOARD COST
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
0 2 4 6 8 10 12 14 16 18
Total Board Cost versus Number of Paid Directors
26
2015 DIRECTOR COMPENSATION STUDY TOTAL BOARD COST
$2,927,550
$2,710,571$2,820,288
$2,941,158
$3,104,661$3,003,888
$2,500,000
$2,750,000
$3,000,000
$3,250,000
$3,500,000
Top 200 < $17.5B $17.5B - $25B $25B - $50B $50B - $100B > $100B
Median Total Board Cost by Revenue
$2,927,550
$2,686,133
$2,984,720 $3,025,547
$3,451,543
$2,886,526$3,026,300
$2,819,292 $2,784,613
$3,246,656
$3,116,653
$2,500,000
$2,750,000
$3,000,000
$3,250,000
$3,500,000
Top 200 ConsumerDiscretionary
ConsumerStaples
Energy Financials Health Care Industrials InformationTechnology
Materials Telecomm.Services
Utilities
Median Total Board Cost by GICS Sector
27
• What to expect for 2015:– Modest increases (+3-5%) in director compensation levels– Increased scrutiny on director compensation levels from
• Media• Shareholder advisory firms
– Increase in share ownership guideline prevalence and guideline value
– Continued decline in meeting fee prevalence– Increased scrutiny on total pay levels and year over year
changes– Continued focus on board-related governance issues
2015 DIRECTOR COMPENSATION STUDY OUR VIEW
28
If you would like a copy of our upcoming 2015 Director Compensation Study or have any questions regarding this presentation please contact Nora or Steven.
Nora McCordnmccord@shallpartners.com
Steven Hall Jr.sehall@shallpartners.com
Join our mailing list to stay up to date on executive compensation issues by visiting our website: http://www.shallpartners.com/contact/
CONTACT INFORMATION
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