Director Pay: Should Board Leaders Get More?

Director pay is coming under scrutiny again—not from investors this time, but from directors themselves. 

The issue has to do with the lead directors of the boards. As boards have expanded their roles and committees, diving deeper into everything from cybersecurity to talent management, the job of lead director has grown more complex and time-consuming. Though they have no special powers, lead directors are charged with orchestrating the board’s responsibilities. Boards have typically chosen the most senior director to be the lead rather than methodically planning for succession.

“To attract qualified people to serve as lead directors, boards are probably going to have to pay them more than they have,” says Stephen Bainbridge, a professor at UCLA School of Law whose work focuses on corporate governance and securities regulation. 

But pay decisions like these—approved by boards, then voted on by shareholders—are always tricky. Lead-director pay, which typically exceeds $300,000 a year at S&P 500 companies, has risen steadily over the years. Proponents say it represents only a modest increase over a regular director’s compensation, despite the extra work. But shareholder advisory firms, activist investors, and the media have all questioned whether director compensation overall is too excessive or in the best interests of shareholders. Any increase gives pause to many directors as well.

Korn Ferry’s Dennis Carey and Joe Griesedieck interviewed more than two dozen current and former board leaders who advise against the practice of paying lead directors more, at least in cash anyway. In an article the pair co-authored for the Harvard Business Review about considerations for selecting a new board leader, they cite one Fortune 50 CEO who noted that directors of public companies aren’t (for the most part) doing it for money, “so why create the optics that one director is more senior than others?”

Or more valuable. Carey, vice chairman and co-leader of the Board Services practice at Korn Ferry, worries about “creating the impression that not all directors are equal.” He cites the cautionary tale of executive committees, which died out in part because directors “felt they weren’t as important” if they were excluded from them. “You don’t want an individual director to think the lead director has more power or impact than they do,” Carey says, “or that there is a hierarchy on the board.”

Still, without a lead director to facilitate activities and serve as spokesperson, board oversight can suffer from fractiousness—or even from mismanagement of strategies and opportunities. One potential solution proposed by Carey and Griesedieck would be to move from cash to a performance-based equity component for lead directors tied to their increased level of engagement beyond the time invested by other directors.

Right now, the additional pay for lead directors and committee heads is primarily in the form of cash, with little transparency on how it’s assessed or determined. Griesedieck suggests that the compensation committee, together with the full board, determine the amount of equity grants and the criteria for awarding them. He says equity grants could help compensate lead directors for the extra workload; these grants would also be more palatable to other directors and shareholders, who would themselves benefit from stronger company performance. “It’s not about paying lead directors more, it’s about paying them differently,” says Griesedieck. 

For more information, contact Korn Ferry's Board and CEO Services or Executive Pay and Governance practices.