Compensating Your Board Directors in 2020

Shortly after publishing the previous post on this blog, people have asked about the amount of compensation a company should pay its board directors. Given its limited resources, it may not be feasible for a startup to compensate its directors. Besides, most directors serving on a startup's board are not expecting compensation as they are often investors in the company and agreed to serve on the board to help the founders navigate the never ending challenges that comes with taking a company from concept to profitability. More mature private companies, however, should be providing financial compensation to their directors. This question is: how much?

In his article, "How Much Should I Pay The Directors On My Board In 2020?" Bernie Tenebaum, Managing Partner of Lodestone Global, a strategy consulting firm based in New Jersey, provides some guidance on the level of compensation. Taking information from his firm's 2020 Private Company Board Compensation Survey, Mr. Tenebaum presents the following highlights:

• "Median total compensation was $43,500, ~4.8% higher than the $41,500 reported last year. The 4.8% increase (+4.5% in 2018) is the result of a 5.5% increase domestically and a 3.6% increase internationally. Technology firms saw the most growth this year, paying their directors +10% more than in 2018.
• "Median revenue of the survey was $100m and the median number of employees was 250.
• "Boards continue to have a strong impact on company performance. 94% of companies reported increased revenues and 92% reported increased EBITDA. Since the respondent joined the board, companies reported an average revenue increase of ~50%. 53% of the participants categorized their boards as 'Indispensable' or 'Very Effective' at driving corporate strategy. These results support the notion that a board, particularly with the right directors, can be essential to achieving corporate goals and improving profitability.
• "Similar to last year, 21% (22% in 2018) of respondents reported using equity as part of their compensation schemes. These schemes tended to target a specific value of the company or shares outstanding. For the fourth year in a row, total compensation for these schemes were paid roughly half cash and half equity."

Source: Lodestone Global

As reflected in the historical compensation data chart above, Mr. Tenebaum explains that "directors earned a $31k retainer, $2,750 per meeting and $750 per formal teleconference. We have seen a steady increase in director pay since 2013. For the second year in a row, the growth in total compensation was primarily driven by U.S. companies, particularly $50-$500m. Domestic compensation grew another 6% year on year, after growing 10% last year. The U.S./International compensation spread has widened to $10,600 (US directors now earn 29% more than their international counterparts). This may reflect the strength of the U.S. markets, both in terms of employment and equity market valuations."

Year on Year Growth in Total Compensation By Industry: Lodestone Global

The article further notes: "After a strong 2018, Financial Services and Utilities/Energy/Industrials firms slowed their growth in 2019. Technology firms rebounded to the top spot driving compensation growth after a weaker 2018. We saw broad based strength across many industries/sub-industries likely commensurate with where we are in the current economic cycle. The decline in manufacturing and retail also seems correlated to the economic weakness in those segments."

What sources do you use to determine how much a company should pay its board directors?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.