The NASPP Blog

In November, results of two separate studies on director compensation were published. Frederic W. Cook released the findings of their 2011 Director Compensation study in a report titled “2011 Director Compensation: Non-Employee Director Compensation Across Industry and Size”. Independently, a joint effort between The Conference Board, Inc., NASDAQ OMX and NYSE Euronext produced the “2011 U.S. Director Compensation and Board Practices Report”. In today’s blog I share some of the stock compensation related highlights from these two reports. For the results of one survey (The Conference Board et al), I rely on a summary published by the Harvard Law School blog.

Two Reports: Similar Findings

Each study was comprised of U.S. public companies across a variety of sectors. Frederic W. Cook’s study spanned 240 companies, and The Conference Board (et al) surveyed 334 companies.

Size Does Matter

In general, one “rule of thumb” was confirmed: that “compensation levels vary primarily based on company size, while the structure of compensation is influenced by both company size and industry.” (Frederic W. Cook). Both studies presented similar results regarding the prevalence of director equity compensation by industry. While not every industry had a clear trend in terms of cash to stock ratios, the financial services industry clearly utilized the least amount of equity (less than 45%) in its compensation approach, and the technology sector utilized the most: approximately 70% of director compensation in this industry is stock based, according to both reports. When it comes to the blend between cash and stock compensation, it turns out company size does seem to be a factor, more so than industry. Larger companies were more likely to have a mix of cash, stock awards and stock options. Smaller companies reflected a more cash heavy compensation mix.

Stock Awards Rule!

The dominant equity compensation vehicle in use for directors across the board (no pun intended!) is full value stock awards (or units). Stock option grants to directors are minimal in most industries (utilized by less than 20% of retail, financial services and industrial companies, according to Frederic W. Cook). The technology sector’s trends were a bit different: companies in this industry predominantly issue stock awards as part of the compensation mix, yet, about 42% of them also issue stock options to their directors. That’s probably not surprising, given that the technology sector has long been assertive in emphasizing various forms of stock benefits as a component of overall compensation.

The Trend Continues: Stock Ownership Guidelines

We’ve previously blogged about the continuing uptick in the number of companies adopting share ownership guidelines for executives and directors. Both studies reported that a majority of respondents (greater than 50%) had stock ownership guidelines for directors in place. According to The Conference Board (et al), the most widely utilized type of guideline is that based on a multiple of the director’s annual retainer. One study noted a smaller related emerging trend – the implementation of a retention ratio or holding period in combination with their ownership guidelines. About 15% of companies analyzed in the Frederic W. Cook study reported having some form of retention ratio or holding period; with 12% utilizing such ratios or holding period in direct conjunction with their ownership guideline policies. This is a trend to watch, and seems very likely to continue to gain momentum.

-Jennifer