Fair Play or Fair Pay for Shareholder-Linked Board Directors?
Boards seating stockholder affiliates have compensation questions to consider.
Managing Director Ryan Hourihan was quoted in the Agenda article, “Fair Play or Fair Pay for Shareholder-Linked Board Directors?"
"For a typical independent director, [boards] are generally trying to accomplish a few things through compensation: Recognize the time and responsibility associated with board service, attract and retain qualified directors, and create alignment with shareholders," wrote Ryan Hourihan, managing director at Pearl Meyer, in an email.
"With a shareholder-affiliated director, some of that work has already been done."
Hourihan explained that the circumstances are different for directors who are already affiliated with a shareholder:
"They're on the board because of who already signs their paycheck; board service is simply part of the job," Hourihan wrote. "The shareholder already has serious skin in the game, so there is little need to pay the director extra, especially in equity, to manufacture alignment that already exists."
When it comes to determining the appropriate compensation arrangement, Hourihan emphasized the importance of considering the individual circumstances.
When determining a pay arrangement, there isn't a one-size-fits-all, Hourihan wrote. Compensation committees need to consider what they are aiming to accomplish by paying the person.
For example, cash can recognize workload, but equity can "give the individual a personal stake in the company that is separate from their employer's investment," Hourihan said, as long as that equity doesn't simply go back to the shareholder.
Also, "there is a meaningful difference between someone representing a 10% shareholder and someone representing a controlling shareholder," Hourihan wrote. "The individual's role, the ownership percentage, the expected board workload and what happens to any compensation that is paid are all relevant considerations."
Meanwhile, pay differences can create tension on the board, sources said.
"Particularly when difficult issues arise where the interests of the company and the shareholder are not perfectly aligned, the director's different economic relationships can become more visible," Hourihan wrote. "It can also become a practical fairness issue over time."
The full Agenda article is available to subscribers.