Unwrapping Board Compensation

Unwrapping Board Compensation

Exclusive survey finds most firms pay annual retainers, with a median amount of $30,000.

Private companies face unique challenges relative to their publicly traded peers when compensating top officers and directors ­— one of which is little data on what these firms pay their boards.

To address the lack of competitive market data, Compensation Advisory Partners (CAP), and Private Company Director and Family Business magazines (both of which are published by MLR Media) conducted the 2019 Private Company Board Compensation and Governance Survey.

The key findings:

Nearly 90% of private companies provide some form of compensation to eligible directors, and most choose to pay board members annual retainers. The median annual retainer is $30,000, and the median per-meeting fee is $2,000. The sizes of the annual retainer and meeting fees grow with company size (See Charts 6 and 7). Some companies also pay eligible directors a lesser amount for participation in telephonic meetings, with the median payment being $1,000.

Survey Methodology

MLR Media sent the survey to contacts in its Private Company Director and Family Business subscriber databases. MLR Media provided the survey responses only (without the respondent’s name or company) to Compensation Advisory Partners (CAP), a leading boutique executive compensation consulting firm. CAP analyzed the data and produced the survey reports with the assistance of MLR Media.

For purposes of analyzing the compensation data elements, only companies that provide the compensation element were included. Some companies that do not offer a particular compensation element provided “zero” as the answer for that pay element. Zeros were omitted in the analysis.

The definitions of several terms used in the survey follow:

Advisory Board: A more informal board that provides guidance and advice to the company’s management team and shareholders, but the board has no legal obligations.

Fiduciary Board: A formal board with voting rights and legal obligations to a company. Fiduciary boards oversee the chief executive officer and management.

Independent or Outside Director: An individual on a company’s board who has no ties to the company through employment or family status, and who has no ownership other than compensatory stock provided for board service.

Inside Director: An individual on a company’s board who works at the company or who has ownership of the company, including through family status.

Median: The data point at which half of the responses are higher, and half of the responses are lower.

The survey, with respondents from more than 600 companies submitting data during the May 2019 survey period, includes private companies based mainly in the United States of varying sizes and ownership structures from a wide array of industries (See Charts 1,2,3,4).

Private-Company Board Compensation Basics

According to the survey, 87% of private companies provide some form of compensation to eligible directors.

In public companies, those eligible for compensation are typically outside directors, or those who have no ties to the company through employment (though representatives of private equity investors sometimes receive cash compensation). In contrast, 45% of private companies compensate board members who are shareholders, family members or executives (“inside” directors).

Another 7.5% of respondents have “other” compensation arrangements for inside directors. This likely means a hybrid approach that involves some level of compensation for such inside directors, but not to the same degree as outside, independent directors.

The high number of private companies that compensate shareholders, family members and executives likely reflects the high percentage of family companies responding to the survey.

Private company board compensation programs have two common cash components:

•          An annual retainer, which is an amount paid to each eligible director on an annual or quarterly basis for board service, is offered by 72% of private companies surveyed.

•          Per-meeting fees are smaller amounts paid to eligible directors for attendance at each board meeting, and they are offered by 54% of the companies surveyed (See Chart 5).

Private companies continue to use both an annual retainer and meeting fees, while the trend for director cash compensation at public companies is to pay a higher annual retainer only and no meeting fees.

Public companies have adopted this approach because directorship requires time and effort beyond meetings, so retainers better reflect the requirements of the overall role. In addition, advancements in technology have made meeting participation easier and have blurred the lines for what constitutes a meeting. Public company directors are expected to attend at least 75% of board meetings so incentivizing meeting attendance is, therefore, less of an issue for public companies. Finally, retainers are easier to administer than meeting fees, which require attendance tracking.

Retainers and per-meeting fees are also used to compensate individuals who take on different roles above and beyond basic board service. According to the survey, 37% of private companies offer incremental retainers and/or per-meeting fees for the board chairperson or lead director. In addition, 35% of private companies offer incremental retainers and/or per-meeting fees for committee service. In contrast with retainers and meeting fees for basic board service, the retainers and fees for differentiated board roles do not track the company’s size in terms of revenue.

Private companies recognize the value that board members bring to the table; however, only about 20% of the private companies surveyed provide long-term incentives to their board members in the form of phantom equity, cash, multi-year incentives or actual equity grants such as stock options or full-value shares. This low prevalence is not surprising, as private companies do not have publicly traded stock. 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.

Table 1 summarizes the board compensation elements reported in the survey. (Additional data is included in the full survey report.)

A final prevalent practice for private companies is to reimburse directors for their travel expenses. While this iteration of the survey did not ask about benefits and perquisites, some companies referenced them in their “other” responses. Future iterations of the survey may quantify such compensation elements.

Designing a Private-Company Director Compensation Program

Private companies that wish to evaluate the design of their director pay programs should first determine what are the primary objectives of the program. Most board pay programs, whether at private or publicly traded companies, will strive to compensate directors for their time, and for the value received by the company for the director’s contributions.

Other common objectives of board pay programs are to:

•          Compete with other companies, including public companies, for board talent,

•          Attract individuals with needed skills, knowledge and interpersonal networks to the board to supplement the executive team and shareholders,

•          Reward directors for contributing to the company’s success, and/or

•          Align director interests with shareholder interests.

Companies that are trying to compete for talent or attract special skills should strive to provide a competitive board compensation program, although director pay does not need to be as high as at a public company. Private company boards have a lower level of risk, disclosure and regulation than their publicly traded counterparts.

Once the objectives of the compensation program are defined, the next steps are to conduct internal and external reviews:

Internal review. This step involves looking at the company’s situation and the board dynamics. Issues to consider during the internal review are the complexity of issues facing the company; the likelihood of mergers, acquisitions and/or divestitures; whether the company plans to pursue a value-realizing event; any potential leadership changes or a generational transition in a family business; the company’s executive compensation philosophy and programs; the shareholders’ desire to share equity or not; whether the board’s role is fiduciary or advisory; directors’ expectations and other boards on which the directors serve; the board’s expected time and meeting commitments; noncompensatory benefits of serving on the board; and which board roles and/or committees are more involved and time consuming. In general, boards and board roles with greater complexity, risk and challenges merit higher compensation.

External review. The external review involves considering how the company compares to its peers and collecting board compensation information for similar companies and/or boards. Sources of compensation information may include informal information from executives and directors about what other companies offer, and more formal information such as public peer company proxy data (generally excluding the equity data) and published survey data, such as the CAP-MLR Media survey. (Companies that participate in the survey have access to specialized data cuts by revenue size, industry and other parameters.) The goal of the external review is 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 the director compensation program.

The shareholders will need to decide what type of pay model to adopt: retainers only, meeting fees only, or a combination of the two. As mentioned previously, publicly traded companies are moving toward a “retainers only” approach for cash compensation. However, the private company survey indicates that more than 50% of private companies use per-meeting fees to compensate directors.

The retainer-only pay model makes sense for companies that wish to pay for overall board roles rather than time spent at individual meetings. Indicators that favor that pay model include material director time required outside of meetings, frequent interaction between board members outside of meetings that could create ambiguity about whether a formal meeting is taking place, a more predictable board workload and a desire for administrative simplicity. Under this model, retainers will need to be set at a level to compensate for all board work.

Retainers also can be used to differentiate compensation for board roles. For instance, a basic retainer can be provided to all directors for board service, and incremental retainers can be provided to committee chairs and the board chair to recognize the additional time, effort, skills and knowledge required for those roles.

At the opposite end of the spectrum, some companies may choose a “meeting fees only” pay model. This pay model makes sense if most of the board work is tied to the meetings themselves. Per-meeting fees can be set to take into account 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 requirements corresponding to board and committee meetings. Under this pay model, committee work can be compensated through meeting fees that are the same as board meetings or less if committee meetings require less time. In addition, roles such as chairman or lead director could be recognized with a higher per-meeting fee.

For companies that fall somewhere in the middle, a combination of retainers and meeting fees might make 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, then meeting fees will be paid to directors.

In addition, the shareholders will need to decide whether to offer any sort of long-term incentive, such as phantom or real equity, for the directors.

Companies that wish to reward directors for contributing to the company’s success and to align director interests with shareholder interests may want to consider providing directors with phantom or real equity stakes, or a multi-year performance bonus.

However, according to the CAP-MLR Media survey, most private companies do not do this. The practice is common for start-up companies that are cash-constrained, and for private equity-owned companies. In both of those situations, stock options are a common vehicle.

Before implementing a new director pay program, companies should consider the prior year’s board schedule and workload, and 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 board of director compensation and determine whether the new program’s costs are reasonable.


While private companies have historically had challenges with regard to competitive board compensation data, the CAP-MLR Media survey helps private companies address this issue.

The survey shows that private companies have unique practices from public companies with regard to board-of-director compensation. Private companies are more likely to compensate a large group of directors, including those who would be considered “insiders” at public companies, and are more likely to use meeting fees. Only a small minority of private companies use long-term incentives, such as phantom and real equity, in their director pay programs.

Companies can design an effective and competitive board compensation program by understanding the company’s and board’s unique situation, and by taking external market data into consideration.

Bonnie Schindler is a principal at Compensation Advisory Partners LLC in Chicago.