For today’s blog, I discuss trends in the use of equity in compensation outside directors, as noted by consulting firm Frederic W. Cook & Co. in its 2016 Director Compensation Report.
The study includes 300 public companies of varying sizes in the financial services, industrial, retail, technology, and energy sectors. FW Cook has been publishing this study annually for well over a decade (the earliest report I can find on their website is from 2001). The 2016 study found that on average more than half (57%) of total director compensation is paid in the form of equity awards (in general, the larger the company, the greater the percentage of stock compensation for directors). It’s worth looking at a few of the trends in the use of equity in director compensation.
Trend #1: Restricted Stock/Unit Awards
With respect to the use of restricted stock and units versus stock options, the study found that:
- Most of the studied companies (more than 80%) grant only restricted stock/RSUs to directors (no stock options).
- Use of full-value-only equity programs increased year-over-year among small-cap companies while staying flat for large- and mid-cap companies. Option-only programs declined in prevalence at large- and small-cap companies versus last year.
- At technology companies in the study, which have historically granted stock options more than companies in other sectors, there has been a significant swing toward the granting of only restricted stock/RSUs to directors (up from 78% to 85% of those companies). The leading sector for stock options is now the industrial group, where 18% of the companies grant stock options to directors.
Two Other Trends
A couple of other trends you should think about for your director compensation, if you aren’t doing these things already:
- Compensation Limits: About a third of studied companies now include an annual limit on compensation paid to directors under their equity plans (in increase from prior years—by way of comparison, only 23% of respondents to the NASPP/Deloitte Consulting 2014 Domestic Stock Plan Administration survey included such a limit on director awards). Companies have been adding these limits in response to shareholder litigation over excessive director pay. FW Cook found that these limits are also increasingly covering total pay, not just equity awards.
- Ownership Guidelines: A majority of studied companies have director stock ownership guidelines. The study notes that these guidelines have been ubiquitous at large-cap for many years and usage at small- and mid-cap companies has increased.
– Barbara
Tags: director compensation, non-employee directors, nonemployee directors, outside directors
Earlier this fall, Frederic W. Cook released the findings of their 2015 Director Compensation study in a report titled “2015 Non-Employee Director Compensation Report”. In today’s blog I share some of the stock compensation related highlights from their report.
Demographics
The study was conducted with analysis of non-employee director compensation practices at 300 US public companies across a variety of sectors.
One Size Fits All?
In this year’s study, virtually all size categories (small, medium and large-cap) of companies that were studied compensate non-employee directors with primarily stock compensation (meaning more than 50% of director compensation was paid in stock awards and/or stock options). This continues a trend of increasing the equity compensation piece of the compensation pie, which makes sense when you think about aligning director compensation with the shareholder value they are tasked to oversee. Interestingly, while stock compensation ruled the majority when looking at size of company, it didn’t necessarily represent the majority of compensation in each industry sector. The financial services and industrials sectors have yet to pass the 50% mark in issuing equity over cash (cash still is the majority of compensation in those industries).
Stock Awards Continue Their Reign
The dominant equity compensation vehicle is full value stock awards (or units). 85% of the companies in the study use dollar denominated stock awards rather than share numbers. Stock option grants to directors continue to diminish. The technology sector continues to be the heaviest user of stock options to compensate directors, but even that industry is trending down in stock option usage – only 22% of tech companies issued stock options to directors (down from 32% the prior year).
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. The overwhelming majority (96%) of large-cap companies have stock ownership guidelines in place for directors. Small-cap companies continue to catch up in implementing guidelines for directors, with 60% having some form of guideline and/or retention policy in place. The good news is that’s up from just over half of small-cap companies last year. According to the Frederic W. Cook report, “The median ownership requirement is now five times the annual cash board retainer.” 10% of the companies studied have a mandatory hold-until-retirement policy for directors.
The report on this study, along with many other NASPP and outside surveys and studies can be found in the NASPP’s Survey and Studies portal. NASPP and co-sponsored surveys can also be found in the Surveys section of our website.
-Jenn
Tags: director compensation, non-employee directors