The 2022 Private Company Board Compensation Survey
Our new survey spotlights trends in director pay levels and offers insights into board compensation plan design.
As competition intensifies for attracting and retaining diverse and skilled directors, private companies are reviewing board member pay levels and plan design in order to be competitive with their publicly traded peers. Pay data for private company board members has not been easily available in the market. To address the lack of competitive market data, Compensation Advisory Partners (CAP) and Private Company Director conducted the third edition of our survey, the 2022 Private Company Board Compensation and Governance Survey. Prior surveys were conducted in 2019 and 2020.
Private company director pay levels
The survey, with respondents from more than 1,200 companies, includes private companies based mainly in the United States. These companies are of varying sizes, ownership structures and industries. (See the sidebar, “About the Survey Participants,” below)
Nearly 90% of private companies provide some form of compensation to eligible directors. In contrast with public companies, 44% of private companies compensate board members who are shareholders or family members (inside directors). The high number of private companies that compensate shareholders and family members reflects the high percentage of family-owned companies responding to the survey. Of the companies that compensate inside directors, 67% compensate them on the same basis as they do outside directors.
Private company board compensation programs have two common cash components:
- An annual retainer (the amount paid to each eligible director on an annual or quarterly basis for board service) is offered by 71% of private companies surveyed. The median annual retainer is $30,000, up from $28,000 in 2020. Board retainers are highly correlated with company size, as shown in the chart titled “Median Annual Retainer by Revenue,” below.
- Per-meeting fees that are paid to eligible directors for attendance at each board meeting are offered by 49% of the companies surveyed. The median per-meeting fee is $2,500, unchanged from 2020.
Not surprisingly, the survey found that the prevalence of long-term incentives for private company board service is low, since private companies often do not have stock that is easily liquid. This contrasts with public-company practice, where the vast majority grant equity to their directors. Publicly traded firms provide at least half of a director’s total compensation in the form of equity, typically full-value shares.
Only 26% of private companies offer long-term incentives to directors, with real equity – stock options or restricted stock/units – being the favored vehicles. The use of long-term incentives increased from 24% in the 2020 survey, indicating that these companies continue to compete for board talent and are working to retain and align board members with the company’s overall success. CAP expects that the use of long-term incentives for director compensation will increase over time, especially at larger private companies.
Typical practices for private company long-term incentive awards are to grant them either annually (41%) or when the director is appointed to the board (36%), and to have the awards subject to vesting, either immediately or over three years. While grant values vary significantly from company to company, the median award value for the overall sample is $34,000 for awards granted on an annual basis. Outside appraisal is the most common valuation methodology, and liquidity is most commonly available upon a value-realizing event (VRE), such as a sale of the company or an IPO.
Private company director plan design
There are four best practices for designing and implementing a director compensation plan.
Step 1: Determine the primary objectives of the plan. Most board pay programs, whether at private or publicly traded companies, will strive to compensate directors for their time, as well as for the value received by the company for the director’s contributions. Other common objectives of board pay programs are to:
- Attract individuals with needed skills, knowledge and interpersonal networks to the board to supplement the executive team and shareholders.
- Compete with other companies, including public companies, for board talent.
- Reward directors for contributing to the company’s success.
- Align director interests with shareholder interests.
Private companies that are trying to compete for talent or attract special skill sets should strive to provide a competitive board compensation package, although total compensation need not be as high as that of a public company. Private company boards have a lower level of risk, disclosure and regulatory requirements than their publicly traded counterparts. There are also intangible factors that should be considered: Why do individuals choose to serve on private company boards? It is not all about money.
Step 2: Conduct internal and external assessments. Once the objectives of the compensation program are defined, the next steps are to conduct internal and external reviews. The internal review involves looking at the company’s situation and board dynamics. In general, boards and board roles with greater complexities, risks and challenges merit higher compensation. Issues to consider include:
- Complexity of issues facing the company
- Likelihood of mergers, acquisitions and/or divestitures
- Likelihood of the company pursuing a VRE
- Potential leadership changes or a generational transition in a family business
- Whether the board’s role is fiduciary or advisory
- Expected meeting frequency and time commitments
- Which board roles and/or committees are more involved and time-consuming
- Board pay fit within the company’s executive pay philosophy
- Shareholders’ desire to share equity or not
- Non-compensatory benefits of serving on the board
- Directors’ expectations and other boards on which the directors serve
- Competitive market data
The external review involves considering how the company compares with its peers and collecting board compensation information for similar companies. Sources of compensation information include informal details from executives and directors about what other companies offer, data from the 2022 Private Company Board Compensation and Governance Survey and, where appropriate, public company peer board pay data as disclosed in proxy filings.
The goals of the external review are to understand competitive compensation practices and ranges and to inform the company’s decision-making. Once the internal and external reviews are completed, company shareholders can make decisions about which director pay model makes sense for the company.
Step 3: Decide which pay components to adopt. Possible pay structures include the following:
Retainer-only for cash compensation. Publicly traded companies are moving toward a “retainer-only” approach for cash compensation. However, our survey indicates that 49% of private companies still use per-meeting fees to compensate directors. The retainer-only pay model is prevalent in 45% of the private companies surveyed. This model makes sense for companies that wish to pay for overall board roles rather than time spent at individual meetings. Indicators that favor this pay model include material director time required outside of meetings, ambiguity about the definition of a formal meeting, a more predictable board workload and a desire for administrative simplicity.
Meeting fees only for cash compensation. At the opposite end of the spectrum, about 13% of private companies surveyed choose a “meeting fees only” pay model, which is down significantly from 23% in the 2020 survey. This pay model makes sense if most of the board work is tied to the meetings themselves. Per-meeting fees can be set to factor in typical meeting length and preparation and follow-up time. Indicators for this pay model include an unpredictable number of meetings, comfort with the administrative efforts required to track and compensate meeting attendance, and most work being done during board and committee meetings. According to the 2022 survey, the median in-person meeting fee is $2,500, and the median telephonic/virtual meeting fee is $1,000.
Combination of retainers and meeting fees. For companies that fall in the middle, a combination of retainers and meeting fees makes sense. Some companies with the potential for a flurry of meetings can stipulate that the basic retainer covers a certain number of meetings. If meetings are required above the number covered by the retainer, meeting fees would be paid to directors for the extra workload.
No cash compensation. For start-up companies where cash is tight or companies that are expecting a VRE, compensation is offered solely in the form of equity. In these cases, there is often no cash compensation for board service.
Long-term incentives. Long-term incentive (LTI) prevalence for private company board service is low in comparison to public company board pay practice. The amount to offer for LTIs depends on the shareholders’ appetite for offering equity. The total pool allocated for board member grants is typically less than 5% of total shares outstanding. Individual award values can range in size. For private companies that also pay cash compensation to directors, a useful “rule of thumb” for annual LTI awards is 1.2 times the annual board cash retainer.
For companies that do not pay cash compensation (such as start-ups or pre-VRE companies), the LTI amount granted to directors varies by company size and is usually granted at the director’s appointment to the board, not annually. The average amount granted to an individual director is 0.5% of total shares outstanding.
Step 4: Calculate the total cost of the director pay program. Before implementing a new director pay program, companies should consider the prior year’s board schedule and workload to calculate what the company’s board compensation expenses would have been last year using the proposed compensation program. This step is particularly important for companies that offer meeting fees. Modeling payouts under a new pay program will help validate the proposed program and flag any potential issues. The company should look at the modeled expenses of the new program relative to past spending on director compensation and determine whether the new program’s costs are reasonable. The 2022 survey participants estimated median total board compensation expense between 0.05% to 0.10% of revenue, which is a statistic that can be used for comparison across companies.
Trends that CAP expects to see in coming years for private company board compensation and governance include:
- An increase in retainer payments for small companies to keep pace with large firms. There seems to be a minimum value of $20,000 that represents an opportunity cost of choosing board work.
- Movement over time to a retainer-only compensation model similar to that of public companies.
- Increased use of LTIs to recruit high-caliber directors, compete with public companies and align board performance with results.
- Additional representation by women and minorities on private company boards. The importance of diversity is increasing, and private companies will need to pay competitively to attract diverse talent to their boards.
While private companies have historically had challenges in obtaining competitive board compensation data, the 2022 Private Company Board Compensation and Governance Survey helps address this issue. The survey shows that private companies have unique practices from public companies. Private companies are more likely to compensate a larger group of directors, including those who would be considered “insiders” at public companies, and are more likely to use meeting fees in addition to annual retainers. Only a minority of private companies use LTIs, such as phantom and real equity, in their director pay programs. Using this external market data in conjunction with an understanding of the company’s and board’s unique situation, private companies are able to design effective and competitive board compensation plans.
For more information about this survey or to participate in the next Private Company Board Compensation and Governance Survey, please email David Shaw, survey director, at email@example.com or survey authors Bonnie Schindler (firstname.lastname@example.org) or Susan Schroeder (email@example.com).
Susan Schroeder is a partner in the Los Angeles office of CAP. CAP’s Bertha Masuda and Bonnie Schindler also contributed to this article.