Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Good talent is always hard to find. Good board members are getting much harder to find and recruit for two reasons. First, there are fewer of them around. Second, the risks of serving have become much more substantial lately.
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Talent and leadership are commodities and as such react to the pressures of supply and demand. As baby boomers age, the supply of talent has become somewhat lower. Some far-sight companies began preparing for the inevitable exodus of talent many years ago and instituted effective coaching and leadership development programs. Companies that did not or could not take this approach are finding the best way to attract new board members to their board of directors is by means of increased compensation.
Talent retirement is not the only consideration in increasing compensation to outside directors. Sarbanes-Oxley and other laws have significantly changed the landscape. Directors are more exposed to the legal, financial, and industrial environment of the company they assist in governing than ever before. The new environment directors must operate in requires additional time to prepare for meetings, additional training and a commitment to continued personal development throughout the director’s service. It also bring additional exposures.
Stockholders and stakeholders expect professional governance from their boards. Investors expect directors to provide oversight and ensure transparency in all financial affairs. Directors are expected to provide objective, sound leadership to corporate management through active, engaged committees and a good board structure. The added burdens of such detailed work has raised the bar for board service and further decreased the supply of talent able to achieve expected results. Increased compensation is the main tool left to organizations to attract high performing leadership with the necessary skills to effectively address issues and provide sound strategic advice to corporate management.
In addition to the increased workload, directors are also exposed to greater liability than boards of the past. Courts are holding directors more accountable for the actions of the corporation. Directors are being held responsible for misconduct on the part of fellow directors and officers. Therefore, directors must be diligent in their oversight responsibilities and ensure all directors and officers are acting in the best interest of the investor. This increased risk to personal assets and reputation, requires greater knowledge and a greater time commitment and therefore it requires companies to compensate directors at a higher rate than in the past.
Boards considering a director compensation plan should consider director compensation as an investment in the company or organization’s future. A board sitting today is passing judgment on corporate management’s current decisions and level of execution; however, the board is also laying strategic plans for the company’s future endeavors. A company can survive an excellent strategic plan moderately well executed; however, a poor strategic plan executed perfectly can often be the demise of a company.
Compensation for directors various widely among different industry groups, but overall director compensation continues to grow but at declining pace according to www.marketwatch.com. The study is based on compensation data filed by 2,329 SEC registered companies and compiled by Salary.com. The study also identifies the trend of paying additional compensation for service on one of the major committees such as the Finance committee or the Succession Committee. Additional compensation is often allocated to Audit committee members as well.
Companies also find providing a mix of compensation is attractive to directors. Retainer fees, and meeting fees are very common, however companies also issue full-value stock and stock options instead of cash and fees. By providing stock and stock options, directors have the added incentive of working to increase the value of the company to stockholders and investors.
As demands increase on directors and CEO’s, compensation is likely to continue to rise. Talent is a commodity and as demand for stronger and proven leadership grows and the available supply shrinks, companies will have to continue to competitively compensate directors to keep pace with the competition.
© Dr. Earl R. Smith II
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Related Articles:
- Recruiting Successful Board Members
- Director Compensation Alignment
- Non-profit Board Compensation Practices
- Some Notes on Board Compensation Norms
- Determining Board Compensation Structure
- Board of Directors Responsibilities – Compensation Committee
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