As director duties have become increasingly burdensome and complex, companies have responded with variations on, and additions to, the traditional fee arrangements. It is now common to see equity awards of various descriptions, deferred fee arrangements, fee differentials between committees and between regular members and chairpersons, and minimum stock ownership requirements, just to name a few alternatives. On the other hand, meeting fees, while still utilized by a substantial minority of companies, may be on their way out.
Every company’s board of directors is different, and director compensation packages are as varied as the boards themselves, making it difficult to identify “best practices” trends in this area. However, it appears that many companies are responding to the increasing complexities of board service by increasing the total size of the director compensation package through higher retainers and equity grants, for example. Their rationale is that the number of meetings can vary dramatically from year to year, depending on the extent to which the company may be facing significant events, such as business combinations, activist investor overtures, internal or external investigations and shareholder litigation, all of which have become regular realities of day-to-day corporate existence. Furthermore, a compensation model that depends heavily on meeting fees and thus generates significant fluctuations in annual total compensation may draw the attention of proxy advisors and institutional investors.
For these reasons, many companies believe that increasing the size of the total compensation package and eliminating meeting fees recognizes these variations in director workload and affirms the company’s long-term expectations of its directors’ overall commitment.
Of course there are limits on how high director compensation packages can go—most fundamentally the constraints of basic fiduciary duties. In addition, corporate governance watchdogs compare company packages against peer and industry standards, as well as against prior year compensation and company performance, and are not bashful about speaking up if they think director compensation is out of line. And don’t forget Delaware’s Calma v. Templeton, which held in 2015 that the absence of “meaningful limits” on the amount of equity compensation payable to non-employee directors subjected the board’s grant decision to an entire fairness standard of review despite the fact that the company’s shareholders had previously approved the plan. (See this Doug’s Note.)
Remember also that more complex director compensation or significant changes from year to year may warrant increased proxy statement disclosure. (See this Doug’s Note.)