In the wake of the worldwide market downturn, demand shock and uncertain future that COVID-19 has wrought, business leaders are now considering how to align board director compensation to business conditions. Many shareholders — also hit hard by COVID-19’s market impacts — are taking a fresh look at board director compensation. They’re indicating they’d like to see boards take “appropriate cuts” in response to the hardships that they and other stakeholders are now facing. Some top executives have voluntarily reduced or even forgone their own salaries to demonstrate solidarity with furloughed or laid-off employees.
Board Director Compensation Trends
The United States’ average public company board director compensation increased from $212,750 in 2009 to $304,856 in 2019. Contributing factors included changes in board composition and governance, which raised the overall number of board seats held by non-executive directors. At the same time, the average hours of labor that directors performed increased as well.
While boards may be working harder now, many directors are experiencing pay reductions as companies struggle to weather the impacts of the pandemic. The Harvard Law School’s Forum on Corporate Governance discussed executive and director pay actions among Russell 3000 companies. Most of these board director compensation actions are reductions in base salary, taken as businesses act to conserve cash and limit near-term operating expense. Some organizations have changed the form or the timing of pay by deferring base salary payments or by exchanging cash compensation for company stock. In addition, most companies are eliminating cash fees. The majority of firms are reducing director pay in line with reductions of the CEO’s compensation.
“When announced for executives, cuts tend to extend to cash retainers for board members, and in a quarter of cases directors took an even bigger hit (in percentage terms) than CEOs.”
In a recent study, CGLytics looked at the 554 companies in the Russell 3000 that had issued pay adjustments to their boards as of May 31, 2020. More than half (57%) of these organizations had extended pay cuts to directors as well as executives (an additional 1% had cut director pay, but not executive pay). Of these companies, 52% had cut base salaries by more than half; a third of these boards took a reduction of 75-100% of their base salaries. Cuts varied significantly: In the hardest-hit Consumer Discretionary sector, one-third of Russell 3000 companies cut board fees by 75%-100%.
The data show reductions in board director compensation that are directly attributable to the pandemic, and like the pandemic itself, it’s impossible to say just how long reductions in compensation are likely to last. In April 2020, 43% of poll respondents were considering COVID-19 in their decisions about board director compensation for 2020, and 37% were not. As of April, the remaining 20% were still unsure how COVID-19 would change board director compensation in 2020. Another 20% of firms had canceled a planned increase, or reduced board director compensation for a defined period.
For most directors, equity forms the largest component of overall compensation. Few boards have announced changes to equity awards.
Navigating Board Director Compensation Decisions
“It’s okay for boards to make bad decisions; it’s not okay if they haven’t thought through and done research prior to making those decisions… It’s important to think through the story that you’re going to be telling in next year’s proxy about what you’ve done this year.”
— T.K. Kerstetter, Inside America’s Boardrooms
COVID-19 has introduced a new period in board service. Its characteristics include intensified demand for the guidance of experienced directors. Paradoxically, increases to executive pay now might be inappropriately timed. Boards can lead by reducing their own pay “for the duration” – that is, until the economic downturn COVID has wrought is reversed. This is especially true in situations where the organization has laid off, furloughed or cut the pay of its employees. Hitting pause on board director compensation increases is an important way to show solidarity with suffering employees.
Whenever markets improve, companies will be better-positioned to restore or raise pay to pre-pandemic levels. What can boards and compensation committees do in the meantime? First, take a step back to develop and align on a set of principles to guide decisions on near-term board director compensation. Stay familiar with — and monitor changes to — proxy advisory firm perspectives, but remain independent of strict guidelines: Only take recommended actions that are appropriate to the organization’s unique situation. Consider the perspectives of company stakeholders in the broadest sense, including not only shareholders, employees, and customers, but also supply chain members, other trading partners, and the local and global communities in which the firm operates.
Diligent partnered with Meridian Compensation Partners and CGLytics to develop a white paper that helps business leaders navigate board director compensation decisions in the time of COVID-19. Download to learn more about the impacts of reducing base salary, to investigate strategies for adjusting performance-based compensation, and to explore ways to design incentive and equity awards to accommodate lower share prices.
From the white paper ”COVID-19: Impact on Executive Compensation”:
If the organization has not yet filed its proxy for 2020, add disclosures to clarify that the proxy relates to information from 2019, that the pandemic will likely impact results for 2020, and that COVID-19 will likely influence board actions to address its effects on business operations.
Lastly, communicate. Share information about the business impacts of the pandemic and its potential influences on board director compensation. Include shareholders in discussions and gather their feedback on contemplated changes.
Meanwhile, institutional shareholders will be monitoring director pay practices. Companies that do not pause board director compensation increases should communicate the rationale for any change to shareholders. They should also anticipate additional scrutiny from shareholder advisory firms, the press, and their own employees.
The economic impacts of the coronavirus pandemic are still very much with us. Companies will continue to reevaluate board director compensation policies over the coming months. Just as COVID-19 has changed daily lives, business operations and a collective sense of economic stability, so it will change board director compensation for some time to come.