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Total expected compensation for outside corporate directors continued to rise in 2020, while boards navigated a near-term pandemic response and planned for the longer-term realities.
Willis Towers Watson’s Global Executive Compensation Analysis Team completed its annual year-over-year comparison of S&P 500 director pay program results, contrasting 2020 proxy data against that of 2019. The analysis of nonemployee director compensation looks at an expected level of pay for a median outside director as of fiscal year-end 2019 and 2018, which includes forward-looking pay level adjustments disclosed for 2020 and 2019 but does not include any potential disclosed impact due to COVID-19.
The latest review shows an expected increase in total direct compensation in 2020 occurring despite minimal changes in median value for individual components of pay, suggesting that outliers and companies with variable fees are driving the increases in total pay levels. However, with COVID-19 still shifting the landscape and affecting certain industries more than others, some boards are having to adapt for the short term while still preparing for the long-term impact of the ongoing pandemic.
Pay program design: Pay mix for nonemployee board members held steady at 60% equity and 40% cash. The median value of individual cash components remained static while the median value of total annual cash compensation increased 2%. Annual stock compensation increased the same amount (2%), but total direct compensation went up just 1%.
- The prevalence of board or committee per-meeting fees each declined by one percentage point while the prevalence of meeting fees paid after attending a predetermined number of meetings (threshold meeting fees) increased by one percentage point.
- The number of companies granting common stock decreased one percentage point as the median value of common stock increased 7%, from $150,000 to $160,000; the median value now approximately matches that of other full-value stock.
- The number of companies granting restricted stock increased one percentage point. Two-thirds (66%) of companies now deliver all or a portion of annual equity compensation through time-vested restricted stock grants, an increase of one percentage point over the prior year. About half (51%) of companies issue restricted stock units. The favored vesting schedule for restricted stock is one-year cliff (69%) followed by immediate vesting (13%).
- One-time initial stock grant prevalence decreased one percentage point as value at the median dropped 11% from $175,000 to $156,000.
- Cash proration (for partial-year service) is near universal (97%) while equity compensation proration has been recorded for two-thirds (66%) of the S&P 500.
Pay program changes: Excluding any adjustments made due to COVID-19, more than half (55%) of companies made changes to their pay programs. A little over a quarter of companies (26%) increased their annual cash retainer; nearly a third of companies (31%) increased the value of their annual equity grant, and 15% of companies adjusted their noncore pay elements.
COVID-19: As of Dec. 7, 2020, Willis Towers Watson research into 2020 proxies and Form 8-K current event filings revealed that just 16% of the S&P 500 have announced changes to their director compensation as a direct response to an uncertain environment created by the COVID-19 pandemic. Specifically, 14% of companies directly reduced compensation, with most changes made to cash compensation:
- 86% reduced cash only, 10% reduced both cash and stock, 1% reduced stock only and 3% did not disclose.
- The median value of the reductions is 50% while the median time frame is six months.
- Industrials (34%), consumer discretionary (32%), energy (25%), communication services (18%) and health care (17%) all disclosed changes at a rate higher than the full index (16%).
- No impact was noted among companies in the utilities sector (0%); limited changes were noted among financials (2%), materials (4%) and consumer staples (6%) sector companies.
Board roles and responsibilities during the COVID-19 global crisis are evolving as companies continue to adapt to current and future challenges. Most changes made were immediate reactions to an uncertain environment and are expected to be short-lived, with no examples of changes expected to last beyond 12 months. However, it remains to be seen to what extent these potential changes will impact overall trends to compensation actually paid in 2020, or if they will permanently alter the scope of director compensation in some meaningful way.
This article was originally published at Willis Towers Watson on Dec. 15, 2020.
About the Authors
Rebecca Burton is lead associate, executive compensation, Willis Towers Watson.
Peter Kim is associate, executive compensation, Willis Towers Watson.