Article: Pay-setting in private enterprise boards: Are you doing it right?

Compensation & Benefits

Pay-setting in private enterprise boards: Are you doing it right?

How much do people get paid for sitting on the board of a private company? The answer is more important than you might expect.
Pay-setting in private enterprise boards: Are you doing it right?

Curious to know how much board members in the Fortune 500, FTSE 100, or NIFTY 100 are paid? There are plenty of surveys and consultants to help you out in this regard. But what about compensation for private companies, family-owned, venture-backed, and other corporations that make up the overwhelming majority? That’s when things get very murky. Privates, as the name suggests, value their privacy; they have few if any disclosure requirements on pay, and compensation consultants don’t earn money researching them. 

Pay setting for board members in private enterprises is a critical aspect of governance and compensation strategy. It should align with the company's goals, industry standards, and the need to attract and retain qualified talent while ensuring fairness and transparency. 

Yes, there are some overall norms and formulae that have evolved in paying private company directors and advisors. Both a strength and a weakness of private company boards is that members are much more likely to be insiders, with personal ownership, investment, or other ties to the firm. Traditionally, this has meant no specific board compensation at all. It would be like expecting to get paid for balancing your own bank account. Yet there are many variations in this. Even family business boards reimburse expenses for board meetings. The slow trend toward adding directors outside the "3 Fs"—founders, funders, and family—has also driven fresh thinking on paying private directors.

For family and non-venture privates, outside or independent board director pay often looks like a relic of overall board pay from 50 years ago. Any equity compensation would be illiquid here. Research from Compensation Advisory Partners found cash is still the most popular tool, in the form of annual retainers (71%), travel reimbursement (53%) and meeting fees (49%). The trend has been away from meeting fees to annual retainers, a mega-trend driven by the move toward online meetings. Pay has been increasing, especially at smaller companies, in recent times. The USA retainers average USD 20,000–35,000, though with wide variation by company size. In India, it is a fraction of this. Infosys used to pay the equivalent of USD 25,000 for board members some time ago.

A venture-backed private board is a very different animal, with equity often the only currency practical for outside directors. We recommend restricted stock as it is much more efficient from a tax perspective. This should vest over a two- to four-year period and total between 0.5% and 1% of total shares outstanding (on a fully diluted basis). Vesting schedules seem to be accelerating, away from four years and closer to two. By the time the venture reaches Series-A funding, modest cash fees for meetings and expenses may be appropriate. 

Private company advisory boards throw in more variation. For venture-funded companies, pay models (as in, equity) and levels tend to mirror those of outside board members noted above. If your company wishes to pay advisors outright, numbers from Executive Advisory Inc. suggest a 2022 USA range of $16,830 to $187,000, with about $60,000 the average. Meeting fees tend to be most popular here since most advisory boards are short-term, making annual retainers clumsy. Independent director salaries in India range from Rs 3.5 lakhs to Rs 96 lakhs, with an average annual pay of Rs 37.5 lakhs. Salary estimates are based on the 36 latest salaries received from independent directors.

As you see, the range is wide, and there are no benchmarks one can set. However, here are some best practices for board member pay setting in private enterprises:

Establish an independent compensation committee comprising non-executive directors who do not have a financial interest in their own compensation. This committee should be responsible for determining board members pay. This committee can ensure fairness and transparency in the compensation process.

Tie a significant portion of board member compensation to the company's performance, such as stock options, restricted stock units (RSUs), or performance-based bonuses. This encourages alignment with shareholder interests. Infosys has introduced performance-based stock options for its board members. 

Conduct regular benchmarking against industry peers to ensure that board member pay is competitive and aligned with market standards. Many global companies, including Apple, use benchmarking to determine executive and board compensation. This practice helps maintain competitiveness in the market.

Clearly disclose board member compensation in annual reports and proxy statements, providing a breakdown of elements such as base pay, bonuses, and equity awards. SEBI (Securities and Exchange Board of India) regulations mandate the disclosure of director compensation in annual reports.

Limit the number of boards on which a director can serve to prevent overboarding, which could compromise their effectiveness and time commitment to each company. Institutional Shareholder Services (ISS), a global proxy advisory firm, provides guidelines on director overboarding to ensure directors can adequately fulfill their responsibilities.

Implement clawback provisions that allow the company to recover compensation in cases of financial restatements, misconduct, or breaches of fiduciary duty. General Electric (GE) has clawback provisions in place to recover executive and board member compensation in certain circumstances.

Conduct periodic reviews and evaluations of board member compensation to ensure it remains appropriate and competitive. 

Ensure that board members with a vested interest in compensation decisions (such as receiving substantial board fees) recuse themselves from compensation committee discussions.

Comply with regulations that require the disclosure of the CEO-to-median-employee pay ratio to provide transparency on executive and board member pay relative to the broader workforce. In the United States, the SEC mandates this disclosure in annual proxy statements.

Engage with shareholders on compensation matters through non-binding "say-on-pay" votes and shareholder outreach to understand and address their concerns. Many global companies engage with shareholders to gather feedback on executive and board compensation and make adjustments based on shareholder input.

These best practices aim to strike a balance between attracting top talent and ensuring fair compensation practices. By following these guidelines, companies can enhance governance, align interests, and maintain stakeholder trust.

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Topics: Compensation & Benefits

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