The NASPP Blog

This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers.  Today’s entry is written by Narendra Acharya of Baker & McKenzie, who will lead the session “50 Ways to Pay (and Tax) Your Board of Directors.”

50 Ways to Pay (and Tax) Your Board of Directors
By Narendra Acharya, Baker & McKenzie

While Board director compensation does not receive the same level of media focus as executive compensation, it does not escape scrutiny (see “Companies With the Highest-Paid Boards of Directors,” The Bottom Line, June 15, 2012). Earlier this year, director compensation was also the subject of a recent unsuccessful shareholder proposal to expand Say-on-Pay to director compensation (see Proposal 5 in Apple’s 2012 proxy statement).

At the same time, director compensation varies across companies to a greater degree than executive compensation practices and is more likely to be more influenced by the company’s historical practice than the company’s executive compensation practices. As a result, there can be substantially greater differences in the structure of director compensation than executive compensation, even within the same industries. Director compensation correlates more with company size than with industry (see “Annual Survey Reveals Emergence of New Compensation Practices,” The Conference Board, November 2, 2011.) These differences in the structure include different vesting practices as well as the availability of deferral elections.

Even when director grants are made under the same equity compensation plan that is used for employee awards, the process and procedures for implementing grants often is quite separate from the employee grant procedures and the grants may be administered by a group that does not generally administer employee awards.

As the makeup of boards becomes more international–recent surveys indicates that up to 10% of non-employees directors are not U.S. nationals–more companies need to address the specific US tax requirements that apply when non-employee directors are a US nonresident alien for income tax purposes. In the absence of specific tax treaty relief, companies can be required to withhold at a flat 30% rate on all of the director compensation paid to US nonresident alien directors. This can be a surprising result–in contrast to the treatment of compensation paid to US citizen/resident directors.

At the 20th Annual NASPP Conference, the session “50 Ways to Pay (and Tax) Your Board of Directors” will provide a multi-disciplinary review of trends in pay practices for directors. The session will also provide an overview of the US tax consequences of directors’ compensation including the use of stock and deferral programs. Finally, the session will address the unique US tax issues related to directors that are not residents of the United States for income tax purposes.