Independent Director’s compensation getting linked with contribution: Grant Thornton Report

Grant Thornton examined director compensation levels and practices at more than 1,500 Russell 2000 Index companies. By going through the proxy statements filed in 2023 the firm identified four key compensation trends that may indicate a change in course.

Tailored Pay Mix: Traditionally, directors received yearly cash and equity retainers, along with meeting and committee fees. Now, companies are customising programs based on directors’ expected contributions. Elements include cash and equity retainers, additional pay for board chairs, committee chairs, and membership roles. Sectors like Healthcare and Technology prioritise equity (60-70%), while stable sectors like Utilities and Financials lean toward cash.

Leadership Premiums: Most companies compensate Independent Directors with cash retainers for board service, and some now offer extra payments for leadership roles. About 53% of Russell 2000 firms provide additional cash to independent board chairs. If the chair isn’t independent, a “Lead Independent Director” (LID) ensures balance. Around 32% of Russell 2000 companies grant a leadership premium to LIDs.

Committee Focus: Meeting fees are now used by only 11% of Russell 2000 companies, averaging $1,500 per meeting. The Financials sector, notably banks, constitutes 40% of those paying meeting fees. Companies are replacing meeting fees with committee retainers, aligning with specific duties, and avoiding excessive meetings for compensation. Public company boards have key committees like Audit, Compensation, and Nominating/Governance, with directors receiving additional cash retainers. Committee chairs may receive double the retainer of committee members.

Equity Vehicle Shift: Restricted Stock Units are the primary choice for director compensation, used by over 70% of Russell 2000 firms. They are less dilutive than stock options, aligning directors with shareholders. Only 17% use stock options, mainly in Healthcare.


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