IDPN Advocate & Connect Webinar: A discussion on board earnings & trends on Director Compensation with Pearl Meyer Tuesday 16 May 2017 INSEAD International Directors Program Corporate Governance Network, IDPN in support of the INSEAD Corporate Governance Initiative
Welcome Meet Your Moderator Mary Francia, IDP-C Member IDPN Committee, Advocate and Connect Initiative Chair mary.francia@insead.edu 2 2
Welcome Meet Your Presenters: Pearl Meyer is the leading advisor to boards and senior management on the alignment of executive compensation with business and leadership strategy, making pay programs a powerful catalyst for value creation and competitive advantage. Pearl Meyer is at the leading edge of trends in director compensation. For over 15 years, Pearl Meyer has authored the National Association of Corporate Directors (NACD) annual compensation report. Our experience in the boardroom working with hundreds of clients each year combined with our analysis of the disclosures of 1,400 public companies gives us the ability to lead the industry in developing new approaches to board compensation. 3
Welcome Meet Your Presenters: Bill Reilly Bill is a Principal in the Atlanta office and is a senior advisor to boards and management teams across a variety of industries and ownership types on all aspects of executive and non-employee director compensation. Representative areas of consulting topics include compensation philosophy, market pay practices and competitive trends, incentive plan design, pay and performance alignment, employment agreements, and regulatory developments. Simon Patterson Simon is Managing Director of the London office. Simon is actively engaged as advisor to the Remuneration Committees of a range of companies and consults widely on the topic of executive compensation and performance measurement. Simon also developed the widely used CEO Value Index or Patterson Index a measure of shareholder value created for every 1 paid in realised compensation to the CEO of a listed company. His team is also author of the London Stock Exchange guidelines on Executive Compensation for newly listed companies. 4 4
NACD Director Compensation Report Top 200 14% Micro 22% Leading Survey on Director Pay Practices and Trends in the U.S. 2016 / 2017 Survey is 18 th Annual Edition 1,400 Publicly-Traded Companies 24 Industries and 5 Size Categories Large 22% Medium 21% Small 21% Revenue Size Categories: Micro: $50M - $500M Small: $500M - $1B Medium: $1B - $2.5B Large: $2.5B - $10B Top 200: Largest 200 Companies in the S&P 500 5 5
NACD Guiding Principles Blue Ribbon Commission Report on Director Compensation Director compensation should be: 1) Determined by the Board and completely disclosed to shareholders 2) Aligned with shareholders long-term interests 3) Used to motivate director behaviour 4) Adequate to compensate directors for their time and effort 5) Approached on an overall basis, rather than via separate elements Recommended Best Practices: 1) Establish a process to determine director compensation in a deliberate and objective manner 2) Set a substantial director stock ownership target and a time frame to achieve it 3) Define a desirable total value for all forms of director compensation 4) Adopt a policy stating a director or director s firm should not be hired to provide professional or financial services to a corporation where he/she serves on the Board 5) Fully disclose in the proxy statement the philosophy and process used to determine director compensation and the value of all pay components 6
Year Over Year Change in Director Pay Non-employee director compensation levels continue to rise due to increased time commitments and responsibilities, albeit at modest levels Director pay increased by average of 3% in 2016; we expect low to mid-single digit increases to continue Director pay levels vary by company size (and industry) Average director annual time commitment in 2016 was 245 hours Median Total Direct Compensation The scrutiny on director pay has also increased among the media, activists, and shareholder advisory groups, such as Institutional Shareholder Services (ISS) Recent high profile litigation cases have enhanced focus on director pay levels and structure Some feel high director pay coincides with other governance problems Annual Growth in Median Total Direct Compensation 2016 2015 2016 2015 2014 2013 2012 2011 2010 Micro $120,286 $115,125 +4% +9% +4% +4% +1% +6% +20% Small $157,292 $149,252 +5% +3% +1% +11% +2% +6% +10% Medium $181,357 $183,864-1% +1% +5% +4% +4% +8% +13% Large $222,227 $220,063 +1% +3% +5% +6% +4% +6% +7% Top 200 $271,456 $266,770 +3% +3% +2% +4% +6% +1% +5% All Firms $191,440 $186,610 +3% +1% +3% +6% +3% +5% +11% 7
Prevalence of Director Pay Components Most companies provide board cash retainers and annual equity grants, but not meeting fees Meeting fee prevalence decreases with company size Full value equity grants are more common than stock options Most also pay additional retainers to committee chairs; 40% to 50% pay member retainer Pay differentiation by committee is common, especially for Audit Some companies are eliminating committee retainers entirely to further simplify program design Premium pay for independent Board Chairs and Lead Directors is also common Prevalence of Director Pay Components Pay Component Micro Small Medium Large Top 200 All Firms Board Cash Retainer 95% 98% 97% 98% 99% 97% Board Meeting Fees 34% 36% 32% 23% 14% 29% Equity Awards 86% 92% 95% 96% 99% 93% Common / Restricted Stock 77% 86% 89% 94% 98% 88% Stock Options 21% 15% 16% 13% 10% 16% Committee Chair Retainer 86% 96% 96% 97% 96% 94% Committee Member Retainer 43% 48% 51% 47% 40% 46% Committee Meeting Fees 36% 36% 35% 27% 24% 32% Committee Differentiation 82% 86% 88% 87% 83% 85% Premium Pay for Non-Executive COB 89% 89% 91% 89% 93% 90% Premium Pay for Lead Director 61% 69% 75% 80% 83% 74% 8
Board Composition and Refreshment Activists and shareholder advisory groups want more board diversity and refreshment; half or more of medium and large companies have mandatory retirement provisions, but term limits are not common Median director tenure ranges from 8 to 9 years, with median age of 64 ISS concern level may rise when average director tenure exceeds 9 years Only 12% of companies have term limit policies Some companies are revisiting equity award vesting provisions to ensure they don t discourage refreshment Equity vesting periods of 1 year or less are common (along with stock ownership guidelines); some companies with multi-year vesting allow for acceleration upon or beyond retirement 9
Director Stock Ownership Guidelines and Holding Requirements Nearly 75% or more of companies above the Micro size category maintain stock ownership guidelines Guidelines are typically expressed as a multiple of the board retainer, most commonly 5X Median time frame to achieve compliance is 5 years Share holding requirements are less common and in most cases only apply until ownership guidelines are met When used, holding requirements often apply to net after-tax shares received upon vesting / exercise of equity grants Prevalence of Stock Ownership Guidelines (SOG) Micro Small Medium Large Top 200 All Firms % of Companies with Any Form of SOG 50% 71% 79% 88% 87% 74% % of Companies with a Multiple of Retainer Guideline 40% 56% 66% 72% 70% 60% Median Multiple of Retainer Requirement 3.0x 4.0x 5.0x 5.0x 5.0x 5.0x % of Companies with Share-based Guideline 7% 6% 10% 11% 12% 9% % of Companies with Dollar-based Guideline 3% 13% 5% 9% 9% 8% Median Dollar Value Requirement $150,000 $200,000 $250,000 $300,000 $480,000 $250,000 Full-Value Share Holding Requirement Prevalence 15% 21% 23% 21% 18% 20% Specified Time in Years 2% 13% 2% 1% 0% 4% Until or Beyond Retirement 12% 9% 15% 19% 56% 21% Until Guideline Achieved 85% 73% 82% 76% 42% 73% Median % of Shares Required to be Held 75% 100% 100% 100% 100% 100% Ownership guidelines/holding requirements maintain shareholder alignment to offset shorter equity vesting periods Among the total NACD sample, 78% use vesting periods of 1 year or less for full value grants 10
Impact of Director Compensation Litigation Many companies are adding annual director compensation limits within incentive plans submitted for shareholder approval in response to recent court cases (e.g., Citrix Systems, Facebook, Goldman Sachs) Courts have ruled allegations of excessive director compensation are not covered by business judgement rule absent meaningful limits that are approved by shareholders, as relates to both equity and cash compensation Meaningful not defined, but some believe 2X 3X current pay level is defensible; common annual pay cap = $500,000 Director pay levels well above peer group median could increase risk of litigation Facebook s shareholder settlement requires an annual director pay analysis by an independent consultant and a Say on Director Pay vote in 2016 on the specific amount of annual equity grants and retainers Say on Director Pay proposal passed with 84% support Ruling may require separate Say on Pay vote any time director pay levels are modified Will Facebook settlement eventually prompt more companies to seek shareholder advisory votes? 2 other companies submitted Say on Director Pay votes in 2016: SolarCity Corp. (88% support) and Juno Therapeutics (87% support); we are not aware of any proposals in 2017 ISS uses the following criteria to evaluate director compensation proposals: Pay magnitude vs peers Problematic pay practices (e.g., tax gross-ups) Director stock ownership guidelines / holding requirements Equity vesting schedule Pay mix: cash vs. equity Meaningful limits on director compensation Use of retirement benefits or perquisites Quality of disclosure on director compensation 11
Director Compensation at Privately-Held Companies While not subject to the same risks or time commitments associated with public company board service, private company directors also spend a significant amount of time on fiduciary responsibilities to various stakeholders NACD governance surveys report average annual time commitments ranging from approximately 155 hours to 190 hours (varies by type of private ownership) Excluding employee-owned boards, average annual time commitments generally increased in 2016 Published survey data on private company director pay is very limited, but generally indicates the following: Pay levels tend to correlate with company size Annual board cash compensation at larger sized private companies (e.g., > $1 billion in annual revenue) is often similar to comparably-sized public companies, while equity grant values (if any) and total compensation are typically lower Prevalence of equity or phantom stock awards ranges from approximately 30% to 45% (varies by size category) Additional compensation is often provided to committee chairs and independent Board leadership Private companies using broader market survey data to benchmark non-employee director pay levels often factor in relatively lower time commitments when establishing desired pay positioning 12
Pay practices vary widely across Europe The median number of Directors on European Boards is 8 and most Boards have, at a minimum, Audit and Remuneration Committees. Despite sharing many similarities, European Director pay practices have some significant differences. For example: Switzerland and Finland frequently deliver a portion of fees in shares, this is not seen in Italy Unlike the US, it is very uncommon to see any European companies requiring Non-Executive Directors to build up a significant personal shareholding Some German companies provide variable compensation to Non-Executive Directors. In contrast, this goes against best practice and governance standards in the UK Austria and Germany pay meeting fees. These are not seen in Switzerland or Sweden 13
Non-Executive Director pay elements Fee Structure Basic Fee Committee Fee Meeting Fee Basic fees typically comprise the majority of the total fee paid to Directors The exact fee varies by role and responsibilities undertaken Committee fees are payable for membership and/or chairmanship of a Committee Meeting fees are payable for attendance at Board at Committee meetings Common for all European Directors Common for all European Directors apart from Finland Smaller companies may only pay for Chairmanship and not membership Commonly used in Austria, Belgium, Finland and Germany Occasionally used in France, Italy and Spain Fee Vehicle Cash Only Commonly seen in Austria, Belgium, France, Germany, Italy, Netherlands, Norway, Spain, Sweden and the UK Approximately half of Swiss companies and one third of Finnish companies also rely on a cash only approach Cash & Shares Two thirds of Finnish companies and one half of Swiss companies provide Director compensation using a mix of cash and shares 14
Median fees across Europe Source: Non-Executive Directors in Europe 2015, Korn Ferry HayGroup The table below reviews Director pay from each country s major investment index. Country Median Basic Board Fees Non- Executive Chairman Non- Executive Director Median Additional Committee Retainers Audit Remuneration Risk Average Other Chair Member Chair Member Chair Member Chair Member Austria 30,000 15,000 7,500 5,000 - - - - - - Belgium 100,000 35,000 16,300 6,300 15,000 8,000 - - - - Finland 89,000 43,900 15,000 - - - - - - - France 250,200 20,000 20,000 10,000 15,000 8,400 - - 12,500 7,000 Germany 188,800 90,000 70,000 37,500 40,000 20,000 40,000 30,000 40,000 20,500 Italy 238,000 50,000-24,000 20,000 16,500 30,000 20,000 30,000 15,100 Netherlands 85,000 60,000 15,000 10,000 10,000 6,300 10,000 6,000 9,000 5,000 Norway 62,600 36,900 16,500 10,500 12,830 7,500 - - - - Spain - 100,000 39,000 27,900 35,000 28,500 - - - - Sweden 197,200 62,000 22,500 14,100 13,500 11,000 - - - - Switzerland 956,800 197,000 49,100 24,500 28,600 24,500 - - 32,700 24,500 UK 459,900 78,600 25,000 15,100 24,200 14,800 36,300 14,500 18,700 9,700 MEDIAN 250,000 69,300 25,000 15,000 20,100 12,100 36,300 20,000 250,000 250,000 15
Board Committee prevalence across Europe The table below reviews Director pay from each country s major investment index. Source: Non-Executive Directors in Europe 2015, Korn Ferry HayGroup Country Median Number of Board Committees Prevalence of Board Committees that cover functional areas Audit Remuneration Risk Nomination Austria 3 100% 84% 11% 68% Belgium 3 100% 100% 10% 76% Finland 2 100% 100% 14% 81% France 4 100% 97% 25% 89% Germany 5 100% 70% 17% 97% Italy 3 100% 97% 83% 71% Netherlands 4 100% 95% 26% 89% Norway 2 100% 83% 4% - Spain 3 100% 95% 16% 89% Sweden 2 100% 96% 20% - Switzerland 4 100% 100% 30% 80% UK 4 100% 100% 29% 98% MEDIAN 3 100% 94% 26% 88% 16
Board & Committee meeting prevalence across Europe The table below reviews Director pay from each country s major investment index. Source: Non-Executive Directors in Europe 2015, Korn Ferry HayGroup Country Board Meetings Audit Committee Remuneration Committee Risk Committee Nomination Committee Austria 3 3 2-2 Belgium 9 5 4-4 Finland 11 5 4-4 France 8 6 5 5 4 Germany 6 5 4 4 2 Italy 9 9.5 6 9.5 5 Netherlands 9 5 4 5 4 Norway 11 6 6 - - Spain 11 7 6 26.5 5.5 Sweden 10 5 4 6 - Switzerland 8 5 4 6.5 4 UK 8 5 5 6 4 MEDIAN 8 5 5 6 4 17
How Boards and compensation have changed across Europe Switzerland continues to pay the highest Director fees of any European country. Italy by contrast has seen a decline in compensation awarded to its Directors over the last three years. The banking, health and life sciences, insurance and technology sectors continue to be the most well compensated The prevalence of Nomination and Risk Committees has increased across Europe over the last three years, particularly in the UK and Italy respectively In 2011, the European Commission published a Green Paper on the future of corporate governance in the EU. It highlighted the advantages of Board diversity. In terms of nationality, most countries have remained the same with Switzerland and the Netherlands being the most internationally diverse In terms of international experience, most countries have remained the same with European median remaining around 60% of directors with the majority of their career experience in the same country in which they also act as a Director In terms of gender diversity, in 2011 83% of European Directors were male. In 2015 this fell to 76%. Significant shifts in gender diversity can be seen in Italy which changed from over 90% male to around 75% male. In terms of the gender pay gap, Germany and France continue to have the biggest gap at 25% and 16% respectively 18
Time commitment of UK Directors Source: MM&K Report, Life in the Boardroom, May 2015 Chairman Annual Fees vs Turnover NED Annual Fees vs Turnover Chairman Annual Fees vs Time NED Annual Fees vs Time 19
UK Governance around the remuneration of Directors What the UK Corporate Governance Code says: The UK Corporate Governance Code which listed companies are required to adhere to on a comply or explain basis state that Remuneration for NEDs should reflect the time commitment and responsibilities of the role. Remuneration should not include share options or any other performance related elements. As with executive pay remuneration for NEDs may also be set by the Remuneration Committee or delegated to separate committee, and subject to approval by shareholders. 20
Q&A 1 Join the discussion! You can also direct them to ALL in the chat box 21
Where to go for more information? Pearl Meyer Materials Atlanta, GA One Alliance Center 3500 Lenox Road NE Suite 1708 Atlanta, GA 30326 Phone (770) 261-4080 London 3rd Floor 58 Grosvenor Street London W1K 3JB, UK Tel +44 (0)20 3384 6711 22
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