Some Notes on Board Compensation Norms

By Dr. Earl R. Smith II

DrSmith@Dr-Smith.com
www.Dr-Smith.com

Companies must have professional governance to

operate in the complex business and corporate
finance environment prevalent in today’s business
world. This is true for privately held companies as well
as publicly traded ones. The question is one of risk
mitigation as much as regulatory compliance.
Corporate directors must have a working knowledge
of Sarbanes-Oxley, compliance management,
corporate finance and must demonstrate personal
leadership, and a willingness to comply with corporate
ethics. In return, directors must receive appropriate reimbursement for
their performance.

High-profile corporate failures and the most recent ‘government

bailout’ of the United States banking system has led many to believe
boards are over compensated and often under-perform in executing
their responsibilities of leadership and oversight. This judgment is
without substantial facts or thorough assessment of all issues. There
are boards that offer less than professional governance, and there are
directors that skirt the legal boundaries and reap undeserved rewards.
However, of the thousands of boards operating throughout the U. S.
most quietly perform their duties without incident. Most boards
execute their duties to enhance shareholder value year after year.

What are the norms of director compensation? According to an article

compiled by Jill Jusko in Industry Week posted March 24, 2008, the
compensation for directors varies wildly from company to company.
She noted the following regarding a study of 3,000 U. S. companies:

o Average compensation, over $1 Million

o Nine companies paid over $2 Million in cash director fees
o Valero Energy spends over $30 Million with most of it going to a
single director
o 32% of companies studied paid less than $500,000 in compensation
to its full board

This last statistic is the most reflective of what is truly the norm in
board of director’s compensation. Directors operate in the same free
market most people in the workforce operate under, supply and
demand. Directors with skills in high demand often land board position
paying a high salary and high total compensation. Directors accepting
these positions contend with overwhelming issues. Some are able to
assist with turning around struggling companies, such as the famous
case of Lee Iacocca at Chrysler. However, some are unable to affect
the change needed or it was too late to save the company.

Most directors simply work to understand their business, report on

their committee’s activities and recommendations and vote in the
manner they feel will best assist their company to achieve its strategic
goals. Most boards have established governance structures with ethical
board members following corporate ethical behavior and protocol that
prevents fraud. Most directors have a leadership style and ethics that
go well beyond Sarbanes-Oxley regulations of transparent financial
transactions.

Boards establish Audit Committees with strong authorities to review all

financial documents and business relationships. Boards are composed
of members deemed as independent from the company’s management
to offer assessments of business practices and outside review of
business relationships and financial reporting. These governance
models instill investor confidence and protect shareholders from inside
financial transactions.

Director’s responsibilities are growing as media and government

scrutiny become tougher. Director’s assessment of management and
CEO performance and compensation are often questioned, and the
public only hears about the company with one or two rouge directors
that managed to bilk the investors out of millions. Many directors serve
with no pay on non-profit boards. Many directors sit on boards and are
not even reimbursed for expenses choosing instead to serve and
donate their time and talents to assist with programs they believe will
enhance their community.

Board compensation is best approached via a survey of comparable

companies and with a focus on the challenges that the directors will be
asked to contend with. If a company is facing possible liquidation, the
fees will have to be greater - the risk and time demands are going to
be heavy. If a company is seeking a liquidity event, the same rules
apply. In both cases, the effort required to protect and extend
shareholder value should be factored into the fee structure.

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Related Articles:

• Officer and Director Vetting

 • Errors and Omissions Insurance - Necessary Protection of Officers
and Directors
• The CEO’s role in board member selection
• Determining Board Compensation Structure
• Board Compensation - Cash versus Equity
• Governance and Risk Management Strategic Plans

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Dr. Smith is a proven senior executive, successful entrepreneur,

published author and public speaker. He serves on boards of directors
and advisory boards or as a strategic advisor to CEOs. Dr. Smith
specializes in turnaround management, strategic planning, leadership
development and executive coaching. He also works as an executive
and/or life coach in the areas of personal growth and spirituality. He is
the author of Amazing Pace: Turbo-charged Business Development - a
book that shows how Advisory Boards can dramatically increase
revenue. Dr. Smith is also the author of Dream Walk: Parables for the
Living - a book of Raven Tales and exploration.