Directors are approving pay raises for board leaders as investor scrutiny intensifies and as competition for new board members and leadership talent grows fiercer. Dozens of Russell 1000 companies opted to increase premiums paid to non-executive board chairs and lead directors in the past year, some even doubling retainers.
Most of the increases in the past year have been focused on the board chair or lead director to acknowledge the additional scrutiny and time commitment that go along with the role, said Ryan Hourihan, a managing director in Pearl Meyer’s Los Angeles office.
Having a competent board chair to stand “in the line of fire” if something goes awry means boards are reluctant to part ways with a high-performing chair or lead director, he said.
Hourihan predicted that some boards will buck the trend of coalescing around median pay and start leading on director compensation in order to remain competitive in attracting new directors and in retaining those who might be eyeing the door.
“Given some of the additional items that have fallen under the board’s purview and the additional liabilities and scrutiny, the pool of competent and readily available directors is shrinking rapidly,” he said.
Boards are recruiting younger directors; older directors are hitting mandatory retirement age, and investors and proxy advisory firms are wary of directors who sit on too many boards, Hourihan said. Those trends, coupled with the competition from privately held and pre-IPO companies and the focus on racial, gender and ethnic diversity have led to beginnings of a “talent squeeze” among director ranks, according to Hourihan. Furthermore, that same squeeze extends to high-performing board chairs. Essentially, the table has been set for a “pop” in board pay, he said.
“It’s not really borne out yet in terms of actual details, but I am getting the underlying feeling based on conversations with clients that the talent pool for directors has become much more competitive recently and it’s very similar to what we’re seeing from the executive talent perspective,” he said. “As a result of that, I would not be surprised to see certain companies willing to deviate from the norm to potentially fill board seats that are, again, with the increased focus on things like ethnic diversity and women on boards, from pools of talent that are already somewhat finite.”
He said his clients have been reworking their board committee charters to detail additional responsibilities and the workloads among the three main standing committees — audit, compensation, and nominating and governance — are starting to even out. While these trends are still at a nascent stage, Hourihan said, the shift could lead to even more simplification among pay for board members.
“We used to see a big dichotomy in incremental committee service, audit versus compensation versus nom and gov…and we still see that, but it’s starting to diminish at a fairly rapid pace,” said Hourihan.
Beyond board chairs, Hourihan said that the responsibilities required by board service and board leadership are “expanding by the year, by the month and nearly by the day at this point in time.”
“With the addition of ESG, with the addition of diversity, equity, and inclusion, you’re obviously seeing a heightened workload and, from a liability perspective, heightened liability at the board level,” he said.