The 2023 Private Company Board Compensation Survey
While employee and executive wages grow, director pay remains flat, but with a rise on the horizon.
Director compensation levels for private company boards are flat for 2023, according to a new survey from Private Company Director and Compensation Advisory Partners (CAP), an independent executive compensation and governance consulting firm. While employee and executive wages grew because of a tight labor market and inflation, private company board compensation levels remained steady because board pay programs are not reviewed annually. CAP expects board compensation levels to increase in the coming years, especially for smaller companies.
The 2023 Private Company Board Compensation and Governance Survey drew 1,500 participants and is a leading source for private company pay and governance data. About 70% of the survey respondents represent family-owned or family-controlled companies. Another 13% of respondents represent closely held companies, while 9% represent private equity-owned companies. The survey respondents span diverse industries and a broad range of revenue sizes.
Cash compensation levels and practices
Of the survey respondents, 87% compensate their directors. The most common forms of compensation and the associated prevalence among survey respondents are:
- Annual cash retainers: 71%
- Meeting fees: 46%
- Incremental compensation for board leadership: 31%
- Incremental compensation for committee leadership: 22%
- Incremental compensation for committee membership: 18%
In terms of pay mix for directors, the most common approach, used by about half of privately held companies, is to provide retainers only. One in four private companies provides both retainers and meeting fees, while one in five companies provides meeting fees only. Most publicly traded companies provide only cash retainers and equity compensation. Meeting fees have been eliminated by public companies in favor of retainers, which are simpler and better reflect today’s work formats, such as informal meetings and ongoing interactions with management.
Annual cash retainers across all participants range from $30,000 at median to $50,000 at the 75th percentile, levels that are flat relative to 2022. Many private companies have compensation philosophies that target board and executive pay between the median and the 75th percentile (i.e., the third quartile of the market). A higher pay positioning is used to recognize the lack of equity compensation compared with public companies. Equity compensation is highly prevalent and makes up more than half of compensation for public company boards.
Board retainers also vary by company size.
The median meeting fee paid by survey participants is $2,500. Meeting fees also are correlated with company size.
Only one in four privately held companies provides long-term incentives (LTIs) to directors, which is not surprising given the companies’ lack of publicly traded, liquid stock. The prevalence of long-term incentives remained flat in 2023. Long-term incentives are more common at private equity- and venture-backed companies than at family-owned and closely held companies. Less than 3% of survey respondents use long-term incentives as their only form of director compensation.
Of the companies that provide long-term incentives to directors, real equity — such as restricted stock or restricted stock units and stock options — is the favored vehicle.
Typical practices for private company long-term incentive awards are to grant the awards annually (39%) or when the director is appointed to the board (38%), and to have the awards subject to vesting. Given these two different approaches, grant values vary significantly. The median award value for annual grants is $32,500. The median award value increases to $100,000 for up-front grants made upon board appointment. Since the typical vesting period for up-front grants is three years, the annualized value of these grants approximates the value of annual grants.
Private companies have work to do on DEI — a topic that is a major focus for publicly traded companies. The survey asked respondents about the importance of board diversity and the number of women and minority directors on the board. Private companies’ assessment of the importance of board diversity has not changed materially over the last three years.
Of the survey respondents, 72% report having one or more women on the board, while 27% report having one or more minority directors. In regard to gender diversity in board leadership, responses indicate that men dominate leadership roles on private company boards, and women are more likely to chair committees of private company boards than they are to chair the board or serve as lead directors.
For 2023, questions were added to the survey about board effectiveness. Respondents overwhelmingly reported that their boards are effective; 89% rated them as effective to extremely effective.
The survey asked about ways to improve board effectiveness and the board’s biggest impacts on the company. Respondents indicated that board effectiveness could be enhanced through more interactions with management and by adding specific areas of expertise to the board that are needed by the company. With regard to the greatest impact made by the board, respondents overwhelmingly cited enhanced governance and having a sounding board for management.
To understand the total costs to private companies of having a board, the survey asked participants to provide average annual total compensation data for one director and for all directors on the board. Total compensation includes annual board cash retainer, board meeting fees and any long-term incentives.
The total cost of governance is correlated with company size. This relationship is driven by differences in the amount of compensation given to individual directors, as well as differences in board size. As a company’s revenue increases, the complexity of operations, regulatory requirements and the responsibilities of the board also increase. To deal with this greater responsibility, larger companies may have a larger board and separate committees. Higher compensation is needed to attract qualified talent and reward board members for their time commitment.
Additionally, participants estimated annual total board compensation expense as a percentage of revenue, which is a statistic that can be used for comparison across companies. Smaller companies have greater governance costs as a percentage of revenue because they need to pay directors at least a certain amount (i.e., opportunity cost) for their time and participation. Costs as a percentage of revenue decrease as revenue increases.
Board compensation and governance changes emerge slowly. Companies review board compensation every two to three years. Governance changes occur as directors retire or leave the board and new directors join.
In the coming years, CAP expects to see the following changes for privately held and family-owned company board compensation and governance.
- Movement away from meeting fees for board service toward retainers only as a simpler way to provide compensation. This has already occurred for public companies. When private companies have predictable board meeting schedules and work occurs outside of formal board meetings, retainers make sense as a way to compensate directors for their overall time and effort.
- Increase in cash retainer levels, particularly for smaller companies. Private companies need to keep pace with economic conditions, the tight market for talent, and competition from larger private and publicly traded companies. CAP anticipates that the $20,000 retainer prevalent at companies up to $50 million in revenue will increase in the coming years.
- Increased use of long-term incentives to recruit high-caliber directors and compete with public companies, particularly at larger or complex private companies. This trend will emerge over the longer term. CAP has received increased interest from private company clients in implementing such plans to compete for talent with public companies. One challenge for private companies in developing director long-term incentive plans is finding a way to reward for value creation while not driving excessive risk-taking.
- Additional representation of women, minorities and younger generations on private company boards. DEI is an important business issue, with research proving the benefits of diverse perspectives. Private companies need to pay competitively to attract diverse talent to their boards and ensure that they are keeping pace with publicly traded peers.
Bonnie Schindler is a principal in the Chicago office of Compensation Advisory Partners. Susan Schroeder is a partner in the Los Angeles office of Compensation Advisory Partners.