WOB board member, Mary Sue Rogers, is a member of the INSEAD International Directors Programme (IDP) Alumni, and has the opportunity to attend many excellent networking and educational events. In May INSEAD hosted a webinar with Bill Reilly and Simon Patterson who are senior team members at Pearl Meyer, a consulting firm that specialises in executive compensation. Pearl Meyer has been conducting compensation surveys for over 18 years on behalf of the NACD (National Association of Corporate Directors) in the USA making them one of the “go-to” firms for compensation advice.
The subject of the webinar was the various compensation schemes, best practice guidelines, rules and regulations regarding board compensation, both for executives and non-executive directors at board level in the USA and Europe. May-Sue Roger's I found the differences between the “two sides of the pond” especially interesting. Here are my takeaways from the thought provoking session.
Equity as part of compensation: Policeman versus Cheerleader
In America, the role of the board is seen as a Cheerleader, and in line with this philosophy, board compensation has a material portion of equity in the company, usually around 50% of the total compensation. Also most board members, for American companies, are expected to build up an amount of personal equity (e.g. share ownership) in the enterprise. The guidelines for this are usually five times the basic compensation. In keeping with the NACD guiding principles, the recommended best practice for director compensation includes:
- Set a substantial director stock ownership target and a time frame to achieve it
- Ensure the company has a deliberate and objective manner for determining director compensation
- Full disclosure in the proxy statement of both the process and the value of all pay components
In America there is an approach of adequately compensating directors for their time and effort, to ensure the director's behaviours align with the long-term shareholder interest.
In Europe, the board is seen as the Policeman and again in alignment with that ethos board directors need to be viewed as not being incentivised and to be truly independent. Compensation in most European countries is 100% cash and very rarely is there any equity. The exception to this is Switzerland and Finland where share equity is used as part of the total compensation for a director. The salary for a director is Europe is usually either a fixed fee for the year or pay per meeting attended, with the fixed fee/retainer per year being the norm of most companies and countries.
In both geographies, additional compensation is provided if you chair the board or sit on one of the committees of the board where the audit committee chairperson is most likely to receive additional compensation.
In the USA the average compensation varies by size of the company with the average across all sizes of listed organisations being around $190k of direct compensation (e.g. not including equity), with the smaller sized companies being around $150k and the largest paying over $220k. Across all business sizes, the average compensation for board members increased 3% between 2015 and 2016.
In Western Europe, the average non-executive director compensation is around €70k (approximately USD 80k), and for the chairperson, it is considerably higher with an average of €250k (around USD 285k). The range across the 14 European countries is significant, with the average pay for non-executive directors in countries like Austria, Finland, France, Italy and Norway being less than €50k and countries such as UK, Germany and Spain being in the €75k to the €100k range. Chairpersons in most countries can expect to be paid at least €100k with again the exception of Austria, Finland and Norway which pay closer to the €50k range (it is worth noting that more than 50% of the Finish companies provide equity to their directors). Switzerland is the exception with the average non-executive director compensation at almost €200k and the average chairperson at €950k.
The salary or guaranteed portion of compensation is materially different between most European countries and the USA with members of European boards compensated less. Equity is the other big difference with the USA having this form of compensation as the norm and requiring board members to build up personal equity in the business.
Hours of Work
The hours required on average from a board director does vary, and in the USA the norm is around 245 hours per year, which includes meetings, preparation and travel. In Europe, the average is about the same, with a chairperson expecting to put in around 300 hours per year.
If you consider just fixed the compensation, this is not an unusually high rate per hour for the type of risk, challenges and exposure the average director could experience. In Europe, the average rate per hour to be on a listed board would be €280 per hour. Much less than a lawyer or accountant would charge in most of the European countries.
Diversity is a challenge for boards on both sides of the Atlantic. This is driven by several factors:
- In America, the average age of a board member is 64, and the average tenure is eight years. In many cases, individuals serve longer than eight years, with the norm being more a retirement age of between 72 and 75. Very few companies (e.g. < 15%) have limited term policies. The consequences of this are a very low churn of board members and therefore difficult to increase diversity quickly unless individuals leave early.
- In Western Europe, the tenure and retirement age does vary by country but is not materially different than America.
- In America, the average number of board members is nine, and in Western Europe, it is eight.
The combination of the above makes it challenging to increase the diversity of a board without taking action to encourage board members to retire, move on to new opportunities or limit their term. Some of these actions could be seen by shareholders as not getting the best “value” out of a board if members leave too quickly. Creating opportunities for both gender and cultural diversity is hard but not impossible.
In the USA most listed companies have at least one board member that is a woman, and overall, organisations in the survey, there are 20-25% female board members. Cultural diversity is not doing as well in America with only 10-15% of all board members being culturally diverse. Women have a high percentage of chairpersons on the remuneration committees; perhaps they are seen as being better able to deal with sensitive issues such as executive comp? Or perhaps it is just a statistical fluke.
Diversity in boards across Europe does vary by country. On average around 25% of all directors are female, and in some countries, significant change is occurring. For example in Italy between 2011 and 2015 the mix went from 90% male to 75% male. In Germany 30% of all board seats must be filled by a woman (DAX-listed companies) and if they cannot find a qualified female candidate they must leave the position open until they do.
In the executive area, there still tends to be a significant gender pay gap in Europe with Germany and France having the most significant (25% and 16% respectively). New legislation such as gender pay gap reporting in the UK will help to create more focus on this area and corrections. This pay difference is less at the board level, as most boards have a fairly fixed compensation for non-executives.
Other types of diversity such as cultural are different in Europe than the USA and tend to be measured by nationality. On average across Europe, 60% of all board members are on boards in the country they have most of their career experience.
And while none of these statistics included Asia, Africa or Latin America as we all know – many of the rules, regulations and guidelines in America and Europe will make their way to other parts of the world (if it has not already happened). Looking is what is taking place in the USA, and Europe can help provide insight into what companies might want to consider concerning board compensation and diversity in the future.
Being part of the INSEAD IDP community offers an opportunity to learn and gain insights for the boards that I participate. A valuable network and unique community that is focused on raising the standards of board governance around the world.
For a copy of the slides used by the Pearl Meyer team for the presentation, please click HERE.
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