The Compensation Committee Handbook, 4th Edition

CHAPTER 4 Director Compensation

This chapter discusses the compensation of directors and the role compensation committees typically play in determining the types and levels of such compensation.

Overview

Director pay continues to change, similar to executive pay. Shareholders want to make sure that qualified corporate directors devote substantial time and attention to the oversight of their investment. We expect to see further changes in director pay plans such as simplification of director pay programs and recognition for leadership roles.

Director compensation has evolved from the early 1900s when directors were representatives from major shareholders (or even the major shareholder) and were only paid travel expenses (and perhaps a meal was provided), to the modern structure of director compensation where the director is not typically affiliated with a major shareholder and substantial compensation is paid, in addition to travel expenses and meals (that has not changed).

In the mid-1990s, it was common for director compensation to be set by shareholders (at least the equity portion of the award). In fact, stock plans would contain fixed share amounts that could be awarded to directors each year. This fixed director pay was a result of interpretation that directors could not set their own pay—only shareholders could do so. At the same time, it was common for directors to receive annual stock awards as a fixed number of shares. This has all changed as directors now set their ...