As compensation for corporate directors shifts more towards paying outside experts for their contributions, S&P 500 board members got a raise of almost $5,000 in 2016, reaching a median of $254,700, according to a study by Mercer, a consulting firm. The biggest winners work in the tobacco industry, led by Louis Camilleri, the non-executive chairman of Philip Morris International (PM) , who earned more than $2.7 million in 2016, according to analysis by BoardEx, a relationship mapping service of TheStreet Inc.
"Over the past five years, there has been an increase in compensation," Ted Jarvis, global director of executive compensation data, research and publications at Mercer, said in an interview. Directors "need to have more credentials" and companies have to pay for that experience, he said.
Median total director compensation in 2016 is up 15% from $221,124 in 2012, according to the Mercer report that looked at information from 360 companies in the S&P 500 that filed proxy statements between January 1 and May 31.
The most common pay elements at S&P 500 companies are cash retainers, annual equity grants, committee chair retainers and lead director or non-executive chair retainers, according to a March 2017 report by Diane Lerner of Pay Governance LLC, which provides advisory services to compensation committees. Twenty years ago, however, director stock ownership guidelines were absent and the director pay model often featured benefits programs, pensions, vesting schedules for equity awards that were three or four years long, equity awards that were in the form of stock option grants, and director awards were expressed as a number of shares rather than grant value, according to Pay Governance.
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One element that is in decline is paying for service on committees such as the audit, the compensation and the nominating and governance committees.
The Mercer study found that "only 58% of companies paid audit members additional compensation (down from 65% in 2012) with proportional declines for members of the compensation committee (48% in 2016, 56% in 2012) and nominating/governance committee (46% in 2016, 52% in 2012)."
"Cutting out additional payments demonstrates a change in pay philosophy, from pay-for-attendance to pay-for-commitment," Jarvis said in a statement. "In today's corporate environment, directors can expect to deal with exigencies that are not easily resolved in the course of quarterly meetings or plenary sessions."
Most committee chairs, however, receive an annual retainer. For audit committee chairs, the typical premium was approximately $20,000; for compensation and governance committee chairs, the premium was about $15,000 in 2016, according to Mercer.
Breaking down total non-executive director compensation by sector, the tobacco sector, which consists of just two companies, Philip Morris and Altria Group Inc. (MO) , pays its non-executive directors the most. The median of the average total compensation for non-executive directors is $399,803 -- mostly, because Camilleri took home $2.7 million in 2016, according to a March filing with the U.S. Securities and Exchange Commission. For comparison, Philip Morris CEO Andre Calantzopoulos earned $18,124,325 in 2016.
In the software and computer services sector, Ansys Inc. (ANSS) paid each of its directors more than half a million dollars in 2016. Lead independent director Ronald Hovsepian, the former CEO of Synchronoss Technologies Inc. (SNCR) , earned $620,228 in 2016, according to an SEC filing.
Apple Inc. (AAPL) leads the information technology hardware group with an average total non-executive director compensation of about $436,000, according to BoardEx. Independent Chairman Art Levinson, CEO of the biotech research and development company Calico, was paid the most among the non-executive directors, earning $552,379 in 2016, according to its 2017 proxy statement.
Conversely, the consumer services sector, which consists of H & R Block Inc. (HRB) and Extra Space Storage Inc. (EXR) , has the lowest median average total non-executive director compensation. On average, the latter pays its directors the least. Compensation for board members at Extra Space Storage range between $28,681 and $202,500. (Gary Sabin, the director who earned $28,681, left the board in May 2016).
Despite the difference in compensation, Ansys and Extra Space Storage are similar in terms of market capitalization, $11 billion and $10 billion, respectively.
"Today, director compensation programs look quite similar from company to company," said John Ellerman, Peter England and Blaine Martin of Pay Governance in an August report. "The primary difference between programs is the level of compensation (typically correlated to company size and/or industry sector), not the form of compensation."
Still, the increasing compensation raises some concerns about whether board members are overpaid. A June 2017 study called "Is Board Compensation Excessive?", published in the Journal of Corporate Finance, analyzed director compensation between 1997 and 2012 and found greater evidence of over-compensation rather than under-compensation.
"Overcompensated directors exacerbate agency problems and lead to reduced CEO turnover sensitivity to performance and a decrease in CEO pay-for-performance sensitivity," wrote Mustafa Dah and Melissa Frye, the authors of the study. "Thus, director excess compensation may be a sign of board entrenchment where overcompensated directors are not necessarily focused on protecting shareholder interests."
Despite these findings, director compensation is "not really on the radar" of shareholder advocacy groups, said Jarvis. Influential proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis and Co. LLC examine compensation in their reports, but usually focus on executive compensation.
It may take the involvement of shareholder advocacy groups in order to create serious compensation change because as Jarvis also said, "Directors decide their own pay."
This is part of a series of stories that comprise TheStreet's Blue Chip Studio, which will illuminate issues related to corporate board performance, activism, dealmakers and personalities revealed by analysis of data generated by BoardEx, a business unit of TheStreet.
Editors' pick: Originally published Oct. 28.