Central University

of South Bihar

Project Work

Name : MRIGANK SHEKHAR

Course : B.A. LL.B. (Hons)
Semester : 9TH
Enrolment No.: : CUSB1513125025
Subject : CORPORATE GOVERNANCE
Submitted To : Dr.P.K.DAS
ACKNOWLEDGEMENT
The project work of “CORPORATE GOVERNANCE” on the topic “DIRECTORS
COMPENSATION”
This project is given by our Honorable subject professor “Dr.P.K.DAS ” and
first of all I would like to thank her for providing me such a nice topic and
making me aware as well providing me a lot of ideas regarding the topic and
the methods to complete the project.

I would like to thank all the Library staffs who helped me to find all the desired
books regarding the topic as the whole project revolves around the doctrinal
methodology of research. I would like to thank to my seniors as well as class
mates who helped me in the completion of this project. I would also like to
thanks to Google and Wikipedia as well as other web sites over web which
helped me in the completion of this project. Last but not the least, thanks to all
who directly or indirectly helped me in completing of this project.

I have made this project with great care and tried to put each and every
necessary information regarding the topic. So at the beginning I hope that if
once you will come inside this project you will be surely glad.

-Mrigank Shekhar
INTRODUCTION

What is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of
a company's many stakeholders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government, and the community. Since corporate
governance also provides the framework for attaining a company's objectives, it encompasses
practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure.

The Basics of Corporate Governance

Governance refers specifically to the set of rules, controls, policies, and resolutions put in
place to dictate corporate behavior. Proxy advisors and shareholders are important
stakeholders who indirectly affect governance, but these are not examples of governance
itself. The board of directors is pivotal in governance, and it can have major ramifications for
equity valuation.

Communicating a firm's corporate governance is a key component of community

and investor relations. On Apple Inc.'s investor relations site, for example, the firm outlines
its corporate leadership—its executive team, its board of directors—and its corporate
governance, including its committee charters and governance documents, such as bylaws,
stock ownership guidelines and articles of incorporation.

Most companies strive to have a high level of corporate governance. For many shareholders,
it is not enough for a company to merely be profitable; it also needs to demonstrate
good corporate citizenship through environmental awareness, ethical behavior, and sound
corporate governance practices. Good corporate governance creates a transparent set of rules
and controls in which shareholders, directors, and officers have aligned incentives.

KEY TAKEAWAYS

 Corporate governance is the structure of rules, practices, and processes used to direct
and manage a company.

 A company's board of directors is the primary force influencing corporate

governance.

 Bad corporate governance can cast doubt on a company's reliability, integrity, and
transparency—all of which can have implications on its financial health.
Corporate Governance and the Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance.
Directors are elected by shareholders or appointed by other board members, and they
represent shareholders of the company. The board is tasked with making important decisions,
such as corporate officer appointments, executive compensation, and dividend policy. In
some instances, board obligations stretch beyond financial optimization, as when shareholder
resolutions call for certain social or environmental concerns to be prioritized.

Boards are often made up of inside and independent members. Insiders are major
shareholders, founders and executives. Independent directors do not share the ties of the
insiders, but they are chosen because of their experience managing or directing other large
companies. Independents are considered helpful for governance because they dilute the
concentration of power and help align shareholder interest with those of the insiders.1

Bad Corporate Governance

Bad corporate governance can cast doubt on a company's reliability, integrity or obligation to
shareholders—all of which can have implications on the firm's financial health. Tolerance or
support of illegal activities can create scandals like the one that rocked Volkswagen AG
starting in September 2015. The development of the details of "Dieselgate" (as the affair
came to be known) revealed that for years, the automaker had deliberately and systematically
rigged engine emission equipment in its cars in order to manipulate pollution test results, in
America and Europe. Volkswagen saw its stock shed nearly half its value in the days
following the start of the scandal, and its global sales in the first full month following the
news fell 4.5%.

Public and government concern about corporate governance tends to wax and wane. Often,
however, highly publicized revelations of corporate malfeasance revive interest in the
subject. For example, corporate governance became a pressing issue in the United States at
the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such
as Enron and WorldCom. It resulted in the 2002 passage of the Sarbanes-Oxley Act, which
imposed more stringent recordkeeping requirements on companies, along with stiff criminal
penalties for violating them and other securities laws. The aim was to restore public
confidence in public companies and how they operate.

Other types of bad governance practices include:

 Companies do not cooperate sufficiently with auditors or do not select auditors with
the appropriate scale, resulting in the publication of spurious or noncompliant
financial documents.

1
Bebchuk, Lucian A., Cohen, Alma and Ferrell, Allen ‘ What Matters in Corporate Governance?’(September
1, 2004). Review of Financial Studies, Vol. 22, No. 2, pp. 783- 827, February 2009; Harvard Law School John
M. Olin Center Discussion Paper No. 491 (2004).
  Bad executive compensation packages fail to create an optimal incentive for corporate
officers.

 Poorly structured boards make it too difficult for shareholders to oust ineffective
incumbents.

Objectives of Corporate Governance -

 It is integral to the very existence of a company and strengthens investor's confidence
by ensuring company's commitment to higher growth and profits. Broadly, it seeks to
achieve the following objectives:

 A properly structured board capable of taking independent and objective decisions is

in place at the helm of affairs;

 The board is balance as regards the representation of adequate number of non-

executive and independent directors who will take care of their interests and well-
being of all the stakeholders;

 The board adopts transparent procedures and practices and arrives at decisions on the
strength of adequate information;

 The board has an effective machinery to subserve the concerns of stakeholders;

 The board keeps the shareholders informed of relevant developments impacting the
company;

 The board effectively and regularly monitors the functioning of the management
team;

 The overall endeavor of the board should be to take the organization forward so as to
maximize long term value and shareholders' wealth.2

2
Ciancanelli, Penny and Reyes-Gonzalez, José Antonio ‘Corporate Governance in Banking: A Conceptual
Framework’ (undated). Available at SSRN: http://ssrn.com/abstract=253714 or doi:10.2139/ssrn.253714
The Main Constituents of Good Corporate Governance are:

1. Role and powers of Board: the foremost requirement of good corporate governance is the
clear identification of powers, roles, responsibilities and accountability of the Board, CEO
and the Chairman of the board.

2. Legislation: a clear and unambiguous legislative and regulatory framework is fundamental

to effective corporate governance.

3 Code of Conduct: it is essential that an organization's explicitly prescribed code of conduct

is communicated to all stakeholders and is clearly understood by them. There should be some

system in place to periodically measure and evaluate the adherence to such code of conduct

by each member of the organization.

4. Board Independence: an independent board is essential for sound corporate governance.

It means that the board is capable of assessing the performance of managers with an objective

perspective. Hence, the majority of board members should be independent of both the

management team and any commercial dealings with the company. Such independence

ensures the effectiveness of the board in supervising the activities of management as well as

make sure that there are no actual or perceived conflicts of interests.

5. Board Skills: in order to be able to undertake its functions effectively, the board must

possess the necessary blend of qualities, skills, knowledge and experience so as to make

quality contribution. It includes operational or technical expertise, financial skills, legal skills

as well as knowledge of government and regulatory requirements.

6. Management Environment: includes setting up of clear objectives and appropriate ethical

framework, establishing due processes, providing for transparency and clear enunciation of

responsibility and accountability, implementing sound business planning, encouraging

business risk assessment, having right people and right skill for jobs, establishing clear
boundaries for acceptable behaviour, establishing performance evaluation measures and

evaluating performance and sufficiently recognizing individual and group contribution.

7. Board positions must be filled through the process of extensive search. A well-

defined and open procedure must be in place for reappointments as well as for appointment

of new directors.

8. Board Induction and Training: is essential to ensure that directors remain abreast of all

development, which are or may impact corporate governance and other related issues.

9. Board Meetings: are the forums for board decision making. These meetings enable

directors to discharge their responsibilities. The effectiveness of board meetings is dependent

on carefully planned agendas and providing relevant papers and materials to directors

sufficiently prior to board meetings.

10. Strategy Setting: the objective of the company must be clearly documented in a long
term corporate strategy including an annual business plan together with achievable and
measurable performance targets and milestones.

11. Business and Community Obligations: though the basic activity of a business entity is

inherently commercial yet it must also take care of community's obligations. The

stakeholders must be informed about the approval by the proposed and ongoing initiatives

taken to meet the community obligations.

12. Financial and Operational Reporting: the board requires comprehensive, regular,
reliable, timely, correct and relevant information in a form and of a quality that is appropriate
to discharge its function of monitoring corporate performance.

13. Monitoring the Board Performance: the board must monitor and evaluate its combined
performance and also that of individual directors at periodic intervals,
 Using key performance indicators besides peer review.

Audit Committee: is inter alia responsible for liaison with management, internal and
statutory auditors, reviewing the adequacy of internal control and compliance with significant
policies and procedures, reporting to the board on the key issues.

Risk Management: risk is an important element of corporate functioning and governance.

There should be a clearly established process of identifying, analyzing and treating risks,

which could prevent the company from effectively achieving its objectives. The board has the

ultimate responsibility for identifying major risks to the organization, setting acceptable

levels of risks and ensuring that senior management takes steps to detect, monitor and control

these risks.

A good corporate governance recognizes the diverse interests of shareholders, lenders,

employees, government, etc. The new concept of governance to bring about quality corporate

governance is not only a necessity to serve the divergent corporate interests, but also is a key

requirement in the best interests of the corporate themselves and the economy.3

Limitations of corporate governance implementation in India

•If the Board is in awe of the family executive, it makes it difficult for the Board sometimes to

ask tough questions or at other times the right questions at the right time in order to serve the

interests of the shareholders better. As a result truly independent directors are rarely found in

Indian companies. Serving on multiple boards is problematic because doing so can

overburden directors, thus hampering their performance, and increase the potential for

directors to experience conflicts of interest between the various corporations they serve.

3
Goswami, Omkar, 2002, “Corporate Governance in India,” Taking Action Against Corruption in Asia and the
Pacific (Manila: Asian Development Bank), Chapter 9.
•It is admitted that contribution of the independent directors is limited because the average time

spent in Board meetings by these directors is barely 14 to 16 hours in a year. In some cases, it

has been found that no proper training and orientation regarding the awareness of rights,

responsibilities, duties and liabilities of the directors is provided to an individual before

appointing him/her as a director in the Board. Also there is unseen but the active participation

of political class.

•The directors on the board are largely reliant on information from the management and auditors,

with their capacity to independently verify financial information being quite limited, while

auditors, as this case suggests, have also been equally reliant on management information.

The relevant issue here is the extent and the depth of auditors’ effort in their exercise of due

diligence. Excessive reliance on information from the management is symptomatic of the

ownership or control of companies in India by business families, and that poses a particular

challenge for corporate governance in India.

39
•The greatest drawback of financial disclosures in India is the absence of detailed reporting on
related party transactions, poor quality of consolidated accounting and segment reporting
leads to misrepresentation of the true picture of a business group.

•Although India's investor-protection laws are sophisticated, litigants must wait a long time

before receiving a judgment. Delays in the delivery of verdicts, high costs of litigation and

the lengthy judicial appointment process in courts make the legal enforcement mechanism

ineffective. According to the OECD, “the credibility and utility of a corporate governance

framework rest on its enforceability.”

•In India, the two audit-related issues which are commonly recognized are that of auditor

independence and the perceived powerlessness of auditors in the face of corporate pressure.

In many cases, they are ill-equipped to handle the needs of large companies, because in the

face of an audit failure, it is very difficult to discern whether the auditors were complacent or

they were pressurized by the concerted efforts of the insiders.

•There is no proper system to monitor the work of audit firms or to review the accounts prepared

by the company’s statutory auditors. However, in the aftermath of the Satyam case, the SEBI

has decided to introduce a peer review mechanism to review the accounts prepared by a

company’s statutory auditor. In addition, the SEBI has also decided to constitute a panel of

auditors to review the financial statement of all BSE Sensex and NSE Nifty companies.

•Also there is no statutory compliance for the companies to obtain a report on Corporate
Governance Rating by the Credit Rating Agencies in India.4

Independence of Independent Directors

It is pertinent to note that only listed companies and public companies having a paid-up share

capital of ten crore rupees or more or having turnover of one hundred crore rupees or more,
or having in aggregate, outstanding loans, debentures, and deposits, exceeding fifty crore

rupees have to mandatorily appoint at least two Independent Directors (or such higher

number as mentioned specifically under Rule 4 of the Companies (Appointment and

Qualification of Directors) Rules 2014]. Private companies are exempted from appointing

Independent Directors. However, private companies may appoint them if the Board is of the

4
Gibson, M.S. (forthcoming), Is Corporate Governance Ineffective in Emerging Markets?,Journal of
Financial and Quantitative Analysis.
opinion that there is a requirement of an Independent Director or if any investment agreement

mandates such appointment.

Independent Directors devote their valuable time to addressing the strategic issues in the

course of the Board and Committee meetings and use their expertise while guiding the

management of the Company from time to time. Independent directors, who are truly

independent, can be an effective barricade against corporate frauds. However, active

oversight and prudent judgment may suffer when remuneration comes into the picture, as it is

an important factor which needs consideration. The extent of remunerating Independent

Directors determines their retention and motivation to discharge their duties without cloudy

judgments.

As per the Companies Act 2013, “remuneration” means any money or its equivalent is given

or passed to any person for services rendered by him and includes perquisites as defined

under the Income-Tax Act, 1961. Now, let us examine the various remuneration models of

Independent Directors in India.5

The remuneration of an Independent Director is restricted to the following emoluments:

1. Sitting Fee: Sitting fee to an Independent Director may be paid for attending

meetings of the Board or committees thereof, such sum as may be decided by the
Board of directors of and shall not exceed INR 1,00,000 per meeting of the Board or

committee thereof.The sitting fee to be paid to Independent Directors shall not be less
than the sitting fee payable to other directors.

2. Commission: The Act allows a company to pay remuneration to its Independent

Directors either by way of a monthly payment or a specified percentage of the net

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discovery.ucl.ac.uk
 profits of the company or a combination of both. Further, it states that where the

company has either a managing director or whole-time director or manager, then a

maximum of 1% of its net profits can be paid as remuneration to its Independent

Directors. In case there is no managing director or whole-time director or manager,

then a maximum of 3% of net profit can be paid. Thus, the basis of payment to the

Independent Directors is the net profit of the Company. The Company is however not

obligated to remunerate its Independent Directors. Hence the Company may pay

profit related commission to the Independent Directors with prior approval of the

members. Given this, the commission should be profit-linked only and not revenue

based. The Act does not eliminate profit-related commission which could create a
conflict of interest since the commission is linked to the company’s performance.

3. Consulting Fee: The remuneration of Independent Directors has been restricted to

sitting fees, reimbursement of expenses for participation in the board and other

meetings, and profit-related commission. Therefore, it can be noted that Consulting

Fee is not allowed to be paid to Independent Directors.

4. ESOP: The Act and SEBI (Listing Obligations and Disclosure Requirements)

Regulations 2015 prohibit the issuance of stock options to Independent Directors, in a

bid to address the concern that it might be causing a conflict of interest and will affect

their independence. An alternative option could have been to place restrictions either

on the total amount of issue of stock options or put a time limit on exercising stock
options, rather than having a complete prohibition.

5. Sweat Equity: The Company may opt to remunerate its Independent Director by way

of issuing sweat equity shares. However, such issuance shall be in accordance with

the procedure prescribed under the Act. The total percentage of voting power of such
 independent director together with his relatives shall not exceed more than two
percent.

6. Refund of excess remuneration paid: If the Independent Director draws or receives,

directly or indirectly, by way of fee/remuneration any such sums in excess of the limit

as prescribed or without the prior sanction, where it is required, such remuneration

shall be refunded to the Company within two years or such lesser period as may be

allowed by the company and until such sum is refunded, hold it in a trust for the

Company. The Company shall not waive the recovery of any sum refundable to it

unless approved by the Company by special resolution within two years from the date
the sum becomes refundable.

Additionally, the SEBI (Listing Obligation Disclosure Requirement) Regulation 2015

requires every listed public company to publish its criteria for payment of remuneration to

Independent Directors in its Annual Report. Alternatively, this may be published on the

company’s website and reference may be drawn thereto in its annual report. Section 197 of

the Companies Act, 2013 and Regulation 17(6)(a) of SEBI (Listing Obligation Disclosure

Requirement) Regulation 2015 states that the prior approval of the shareholders of the

company is required for making payment to its Independent Directors, as recommended by

the Board of the Company.6

Board of Directors Compensation-

There has been a massive shift in how outside Board Directors have been paid over the past
20 years. This has largely been fueled by changes in corporate governance practices over
time. Overall, the shift has been away from paying Directors like executives and towards
paying outside experts for their time and contributions during their term of service.

Historical Context

6
https://corpgov.law.harvard.edu
Twenty years ago, the Director pay model at a large corporation often had the following
features:

 directors were commonly eligible for certain benefits programs and pensions;

 vesting schedules for equity awards were 3 or 4 years long, similar to those for
executives;

 equity awards were in the form of stock option grants (also used for executives), and
Director awards were expressed as a number of shares rather than a grant value;

 many companies did not differentiate pay for Committee service; and

 Lead Director roles and Director stock ownership guidelines were absent.

Although some changes were caused by market conditions, we believe most of the changes to
Board pay over the past 2 decades were driven by the following 6 governance-oriented
drivers:

1. 1996 NACD Blue Ribbon Commission Report on Director Professionalism

This was a very influential report covering recommended roles and responsibilities of the
Board. It included strong recommendations to pay Directors via cash and equity and to
dismantle Director pension and benefits programs because they created too much alignment
with the existing senior management team. It was also an early proponent of having an
independent Director in charge of certain Board activities, eventually leading to the rise in
prevalence of Lead Director roles.

Within a few years of its publication, most major companies had eliminated/frozen Director
pensions and significantly reduced Director benefits, putting more emphasis into equity-
based compensation.

2. Sarbanes Oxley (SOX)

SOX, effective in 2002, came out on the heels of the Enron scandal and multiple stock option
“back-dating” scandals. It reframed the Board’s responsibilities and included an expanded
role for its Audit Committee.

SOX influenced several changes. It led to an understanding that the Director role would be
more time consuming and subject to more scrutiny, which led to higher Director pay to
recognize expanded time requirements. It caused more differentiation in pay by Committee,
with premiums paid to the Audit Committee members and Chairs, who had expanded duties
under SOX. Following SOX, and the various scandals that led to it, the majority of
companies shifted from using stock options to using full value shares for Director equity
grants.

3. Elimination of Staggered Board Elections

In the past, the majority of companies had staggered Board elections: 60% as of 2002,
according to one study. [1] A typical staggered term structure had 3-year terms for each
Director, with about one-third of Directors up for election annually. There were several
reasons for the popularity of staggered terms, including a desire to increase stability and have
a form of takeover defense in place. Shareholders and governance organizations engaged in a
multi-year campaign for annual elections, which allowed shareholders to vote on the full slate
of Directors every year. The vast majority of companies now have annual elections for the
full Board: less than one-third of the S&P 500 companies still have staggered Boards
today. [2]

A 1-year Board term led to a compressing of Director equity vesting schedules so that vesting
is completed by the end of the Board term. When Directors had 3-year terms, equity vesting
of 3 years (or longer) was more common, matching equity vesting schedules used for
executives.

4. Recent Focus on Board Replenishment

Especially in the past 5 years, there has been increasing shareholder and governance
organization focus on Board replenishment with the idea that more frequent Director
changeovers could promote enhanced diversity, add new ideas and specialties, and potentially
benefit Director independence.

This is another factor leading to shorter vesting schedules for equity awards, eliminating any
economic obstacles to Director retirement. It has also led to the heightened importance of
ensuring that competitive packages assist in recruiting highly-qualified candidates.

5. Separation of CEO and Board Chair

Over the past 20 years, corporate governance organizations and some shareholder activists
have pushed for the separation of the Chair and the CEO roles. In the past, most U.S.
companies had CEOs in both roles; this is different from typical practice in other countries
such as the U.K., where the roles are separate. There has been a significant uptick in separate
Chairs recently (44% of the S&P 500, up from 21% in 2001). [3] While many companies
have not separated the 2 functions, there has been a rise in the independent Lead Director role
to ensure that certain Board activities are handled by an outside Board member rather than
the CEO in those cases.

How to handle a Committee with an unusually high number of meetings in a given year

This is another area which is complicated by the elimination of meeting fees. What do you do
if, due to some unforeseen circumstance such as an acquisition or crisis, a Committee has an
unusual high number of meetings in a given year? When the number of meetings rises above
20 for the year, the regular Director package may be insufficient for the vastly-expanded time
demands. One way to handle this situation is to create a special retainer, but these can be
difficult to explain. Further, it can be hard to establish a clear standard for when the company
will or will not pay a special retainer. A potentially simple approach would be to establish a
Committee retainer, which covers up to a specific number of meetings (perhaps 10) in a given
calendar year. If there are more meetings than that, the company begins to pay a per-meeting
fee. It is better to decide in advance how best to deal with a high volume of Committee
meetings rather than trying to design a stop-gap in the middle of a challenging Committee
year.

How to offer deferred compensation

Many companies, especially those in the S&P 500, allow Directors to defer cash retainers;
many also grant deferred stock units, which Directors receive after they leave the Board.
While both practices are competitive and can be an attractive part of the package to Directors,
it is important for company management to consider how many deferral choices can be
reasonably administered. Should Directors get the entire deferred amount in a lump sum the
year they leave the Board? Can Directors elect to take deferred balances in installments over
5 or 10 years? More choice is attractive for Directors, but it is important to consider how
much the company can affordably administer. This issue is particularly true for small- and
mid-cap companies with leaner in-house resources.

Another item related to deferred compensation is mandatory equity deferral programs, where
equity awards are automatically deferred until Directors leave the Board. This type of design
can be very beneficial, and it eliminates potential concerns over Director insiders selling
stock to cover tax costs while on the Board. However, there can be very large differences in
age and wealth across a group of Directors: large mandatory deferrals may be attractive for
some and less attractive to others. It is important to make sure all Directors understand the
economics and ramifications of mandatory deferrals and agree on the design before
implementation, since it is almost impossible to change the deferrals once they are in place.

Recent Emerging Issues

A recent litigation decision has further reinforced the importance of having a clear process for
making Director pay decisions—including having specific Director equity grant limits— in
place to reduce exposure to lawsuits on Director pay. This topic garnered much attention after
a recent Delaware Chancery Court ruling (Calma vs Templeton): the Court refused to apply
the business judgment rule to dismiss claims against Directors who received large restricted
stock awards.

 The Court decision was driven by the fact that Directors approve their own
compensation, that there were only generic individual equity award limits in place in
the equity plan (ie, the limit applied to all plan participants and was not specific to
Directors), and that the limit was seen as not “meaningful.”
 Following this decision, companies started reviewing their Director equity plans, and
many have filed meaningful equity limits for shareholder approval. These limits are
 best set as a dollar amount. In addition, as a result of this ruling and the desire to
reduce exposure to litigation, certain other practices are being considered on a
company-by-company basis:
o having a standalone Director Equity Plan rather than combining it with the
Executive Plan;
o considering cash (or total) compensation limits, even though the focus of the
lawsuit was on equity awards;
o ensuring that an appropriate and robust process is in place for determining
Director pay competitiveness; and
o providing expanded disclosure of the pay-setting process in the annual proxy.
 Across the S&P 500, we have seen a significant uptick in the submission of Director
equity limits for shareholder approval since 2013, with limits generally in the
$500,000 to $1 million range.

Predictions for the Future

While always difficult to predict, we offer these thoughts on areas which may see more
attention in the next 10 years:

 Perquisites—While many of the larger Director perquisite programs have been

eliminated, certain programs are still used by some companies, including product
discounts, charitable contribution matches, and spousal travel reimbursement for
certain Board events. Given the current environment, it is likely that there will be
continued pressure to reduce Director perquisites.
 Executive Chair Pay For Former CEOs—As part of the succession planning
process at some companies, the retiring CEO becomes Executive Chair for a few
years. Compensation packages for these Executive Chairs range widely and in some
cases can be as much or more than the new CEO’s. While continuity and smooth
succession are important, we believe shareholder activists and proxy advisors may
start paying more attention to the size of Executive Chair packages for former CEOs,
particularly if such legacy pay levels continue for ≥1 year after retirement and do not
correspond well to the level of effort exhibited by the incumbent.
 Lead Director Pay—When the Lead Director role began, it often was unpaid. As the
role has evolved, compensation is now commonly just above the level of retainer
provided for the Audit Committee Chair. As this role takes on more prominence and
demands more time, we expect Lead Director pay will exceed Committee Chair pay
by a more significant margin.
 Relationship of Pay Premiums for Non-Executive Chairs versus Lead
Directors—Non-executive chair pay continues to be substantially higher than Lead
Director pay: based on the S&P 500 data shown earlier, a Non-Executive Chair is
 paid about $100,000 more for the role. This pay gap between the 2 roles may be based
on valid differences in role and responsibilities. However, it is not always clear to
outside stakeholders what the exact roles are. As most large companies have 1 of
these 2 roles in place, we expect more discussion in the future on what the premium
should be for each of the 2 roles. As noted above, we believe Lead Director pay will
increase, closing some of this gap.7

Key Types of Executive Compensation

compensation plans come in a wide variety of shapes and sizes depending on what business
objectives the organization is aiming to achieve, the desired complexity of the plans, the
demographics of the organization in terms of size, revenue, and industry/sector, as well as the
various legal stipulations that apply to executive pay.
However, many of the basic structural elements of executive compensation are more
constant, with variations occurring in terms of strategy and implementation. Below, we
provide examples of several of these key types of pay based on the results of the EAA
National Executive Compensation Survey.
1. Base Pay
Perhaps the most straight forward and familiar piece of executive compensation, most
participants in the 2014 survey determine base pay using market pricing, much like any other
employee’s salary. Although annual pay adjustments for executives continue to run slightly
higher than those percentages offered at other employee levels, the 2014 survey actually
reported slight decrease in base pay increases as compared to the 2013 adjustments.
For the 47 executive positions surveyed increases, on average, remained above the 3% mark
and when calculated only including organizations projecting increases, this number is a
slightly higher figure: around 4%.
Among organizations providing increases only, the positions that saw the highest percent
increases include the Chief Executive Officer and Chief Executive (Multi- Function
Responsibility) both at 5.2%, followed by Human Resource VP/SVP and Vice President of
Engineering at 4.6%.
2. Short-Term Incentive
Short-term incentive is typically performance-based and designed to drive the business
strategy and key goal achievement.
Metrics are typically a combination of revenue, profit, operational, or customer service
related goals, and often include a component tied to individual performance goals.
3. Long-Term Incentive

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https://www.investopedia.com
Long-term incentive rewards longer-term performance based goals that are often established
on a two or three year rolling basis. Awards can be made in cash or equity and a great number
of design features and alternatives can be considered and tailored to meet an organizations
unique needs.
4. Benefits
Some benefits for executive level employees are simply enhanced versions of those offered to
the non-executive workforce such as, extra levels of life insurance, fully paid medical
insurance, supplemental pension plans, etc.
5. Perquisites (aka Perks)
While the use of perks is declining, it can be a useful tool to attract and retain key executive
top talent. Examples include club memberships or a company vehicle. However, these perks,
taken to the extreme can also be a PR nightmare or cause conflict internally if viewed as too
extravagant. Typically, these perks are most common only for the uppermost executive job
titles and are also more common in the private over the public sector where factors such as
shareholder and media scrutiny are less of a concern.
As we have only scratched the surface, clearly the range of offerings that go into an executive
compensation plan is extremely complex. But with the help of strong strategic business goals
and an established compensation philosophy, as well as reputable sources of data for creating
the necessary benchmarks, executive pay can be effectively leveraged to help ensure a strong
future for any organization.

OTHER THAN GENERAL THERE ARE FEW MORE TYPES OF DIRECTORS

COMPENSATION THEY ARE AS FOLLOWS –8

1.Cash Compensation
The main benefit of cash compensation is that it maintains directors independence from both
management and company.it enables directors to perform there duties objectively and free of
any conflict of interest .because they are paid regardless of firm performance. They do not
consider possible effect on their personal finances when they formulate corporate policy.it
keeps directors independence from company and does not encourage to think like owners.in
todays risky environment many directors refer to be paid in cash perhaps in order to isolate
them from the risk associated in equity ownership.
2.Equity compensation
Nearly all the largest company in USA used equity in the company in some part of their
directors compensation package. Directors may be given full value of stocks. Many

8
NOTE OF CLASS ON THE TOPIC
companies also used stock auctions as equity compensation for directors stock auction are
granted to directors generally in annual basis and expire 10 years from the date of issue.
Equity compensation gave directors a psychological incentive to improve the performance of
corporation. These psychological benefits of stock ownership are powerful motivators to
influence the price of the stock.

Conclusion
Director pay is very important in recruiting and retaining highly qualified Directors. It is also
symbolically important as a representation of the company’s attitudes towards corporate
governance. We anticipate further changes over the next 2 decades as corporate governance
continues to evolve.