The business world’s response to COVID-19 has evolved from initial concerns over safety to more complex considerations like board director pay. Board directors for private and public companies alike see their responsibilities heightened as they manage through unprecedented change. But private and public board director responsibilities are not identical. Private company board compensation data is difficult to come by, whereas public company board compensation topics are beset with complexity. Here, we try to make sense of the differences in private versus public board director pay.
Whether private or public, board members support management, anticipate risk, and maintain the long-term view for a business. They review board packets, attend meetings, approve financial reports and serve on committees. Nevertheless, private and public businesses differ dramatically in their regulation, and that is reflected in private versus public board director pay differences. While responsibilities may be alike in essence, public directors are bound to follow formal, rigorous procedures to meet compliance obligations and to protect themselves from liability.
How Private Versus Public Director Roles Differ
Privately held businesses don’t face the intense scrutiny that publicly traded businesses do. They’re often owned by families or partnerships, so they don’t answer to shareholders. The CEO could be the major shareholder, or even a founder. When the CEO holds the bulk of the shares, the board can’t veto decisions or terminate the individual. This reality relegates the board to a purely advisory role. Because private companies aren’t bound by securities regulations, executives are not bound to share all information with their boards.
Publicly traded businesses must disclose activities and finances in line with securities regulations. They must document decisions and rationales for the benefit of their shareholders (who in fact own the publicly traded business), and for the benefit of other stakeholders. Therefore, public board directors incur greater responsibility and liability than private board directors. Scrutiny abounds, from governmental authorities, from investment advisors, and from the shareholders themselves. Public board directors are required to disclose associations that could represent conflicts of interest.
How Private Versus Public Director Compensation Differs
Undoubtedly, 2021 will be an unusual year for board director pay. Qualitative strategic measurements may be emphasized over financial metrics, and firms may opt for more frequent evaluations of performance to accommodate a rapidly changing business environment.
Private board director pay information is often tricky to obtain; these businesses are under no obligation to share such information, so data originates from the self-selecting sample that voluntarily participates in surveys. In January 2020 (pre-pandemic), Lodestone Global published its 2020 Private Company Board Compensation Survey. The survey analyzed private board compensation in 375 companies across 33 different industries and 38 countries. The sample’s firms had a median revenue of $100 million, and a median employee headcount of 250. In May 2020, Aon compared private company outside director pay to public company director pay. We draw from these sources to evaluate private versus public board director pay differences.
Privately held businesses offered board director compensation 36% ($106K) lower than publicly traded businesses. The disparity is driven principally by lower amounts of long-term equity, but private companies sometimes partially make up the difference by paying more in retainers and fees. Pre-pandemic at least, private firms (while paying less) were increasing board compensation faster than public company counterparts by a small margin. Nevertheless, private businesses offered retainers valued at 44% of those offered by similarly sized public firms. Even though they don’t trade shares publicly, private companies can offer stock or shares as a component of director compensation. 20% of private firms offer equity to their directors, versus 96% of publicly traded companies.
In January, Lodestone reported total compensation of $44K for private board directors versus $170K for public board directors (a $125K difference). In May, Aon reported a $106K difference in private versus public board director pay. The difference between the studies may be explained by study timing, methodology, research sources, and the participating cohorts.
“Since public companies face greater regulatory and disclosure requirements, there is more time and effort needed on the part of public board directors.”
While there is generally an abundance of information concerning public board director compensation, the current pandemic has rendered a complex picture that’s hard to read. Information is aging fast now, and stories dating from last spring don’t describe the current moment. Public board compensation in 2020 is in flux as businesses sort through timing of long-term awards, and pay decisions vary in accordance with how the industry sector is prospering.
Only around 10% of publicly traded businesses had announced pay cuts for directors in response to COVID-19 as of the second quarter, but more cuts are likely to be announced in the months to come. Cash retainers were cut 25-50%. Much of the public board director compensation is in the form of equity. Because prospects differ based on industry sector and value differs based on the timing of rewards, it’s difficult to say any single thing about public director pay in the time of COVID-19. While stock prices have recovered since March, retail, travel, and other consumer-discretionary businesses (for example) continue to suffer. Typically, compensation committees benchmark pay through the summer to develop next year’s pay programs in the fall. With 2020 being the exceptional year that it is, boards struggle with little insight to adjust outdated pay programs. Different public firms will take different approaches to address this problem.
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As a result of the pandemic, a sense of shared sacrifice and a desire for fairness are more apparent this year. Public companies can expect heightened scrutiny from shareholders and other stakeholders if directors don’t take their perceived fair share of COVID-19’s financial downside. Boards should be prepared for scrutiny, and carefully document how board director pay decisions align with long-term shareholder value.
As strategies for 2021 continue to evolve for companies both public and private, board directors will need to demonstrate greater creativity, adaptability and flexibility than ever before. This is as true for compensation decisions as it is for the other arenas that private and public boards oversee.