Director Stock Compensation: Three New Studies Reveal Trends In Stock Options, Restricted Stock, And RSUs For Directors On Company Boards

Trends in the use of stock options and restricted stock/RSUs for directors on corporate boards is a topic on which equity compensation surveys are often silent. This is why we were pleasantly surprised to find no fewer than three recent surveys that include details on stock comp for directors. The trends they reveal will undoubtedly be of interest to many compensation and stock plan professionals.

Towers Watson, a compensation consulting firm, published data on equity awards to directors in its newsletter Executive Compensation Bulletin. The firm reports that while most Fortune 500 companies tend to pay an equal mix of cash and equity to directors, recent increases in pay have come from the stock side. The firm views this as a way to further strengthen the alignment of interests between shareholders and directors.

At the median, the mix of pay for directors was 45% cash and 55% equity in 2011. These figures were 48% cash and 52% equity back in 2009, and Towers Watson attributes the shift to some companies that have increased grant values. The firm states that equity awards to directors are now almost entirely restricted stock grants, and the number of Fortune 500 companies using stock options has dwindled to a "select group." The value of equity awards to directors has not been affected by volatility in stock prices because most companies base grant guidelines for directors on a fixed value rather than on a fixed number of shares. The median value of annual equity awards for directors rose 9% between 2010 and 2011, to about $125,000.

The most common type of grant made to directors is restricted stock or deferred shares (79%), followed distantly by a combination of stock options/restricted stock (11%) and by grants of just stock options (3%). Stock ownership guidelines and share retention policies appear at 87% of the companies (up from 83% in 2010). The median value of the stock ownership required is $300,000.

In an analysis of director compensation in 2011 at S&P 500 companies, the HR consulting firm Mercer found the following:

• Most of the companies (77%) grant only restricted stock to directors.
• The percentage of companies granting options or SARs to directors fell from 26% in 2010 to 22% in 2011.
• Stock options are awarded alongside restricted stock at 18% of the companies, where typically each grant type makes up about half the total value of a director's equity compensation.
• The majority (62%) of the companies award at least one grant type on a fixed-value basis, meaning the dollar value of grants remains the same each year, with a variable number of shares or options accordingly.
• At 23% of the companies, new board members get both a yearly grant plus a separate initial equity award upon the election to the board of directors.
• Annual cash retainers for directors increased in 2011, to a median value of $75,000, while stock compensation rose 10%, to a median value of $131,900.

In its 2012 Director Compensation Report, the consulting firm Frederic W. Cook & Co. found some similar trends in its research, which covered 240 public companies in the financial services, industrial, retail, and technology sectors, divided into three size categories based on market capitalization. Among the firm's key findings:

• Full-value stock awards (restricted stock and RSUs) are the "most prevalent" form of stock grant, using a fixed-dollar value for the grant size. This is a continued shift away from options and fixed-share grant sizes.
• The number of companies using stock options has declined about 25% since the prior study. Stock options are used by less than 15% of the financial services, industrial, and retail companies, by contrast with 34% of the tech companies.
• The average pay mix varies among sectors and company sizes. For example, stock awards make up 49% and stock options 17% of the total compensation at tech companies (the remaining percentage is cash), while at financial service firms the corresponding percentages are 41% and 3%.
• Large-cap companies grant more equity compensation (56% stock and 8% options) than small-cap companies (38% and 7%). The firm explains that large companies are under more pressure to align pay with shareholder interests.
• In the industrial and retail sectors, 85% of the companies use stock grants only, while 17% of the tech companies and 5% of the retail companies provide only stock options. At tech companies, 17% use a combination of stock grants and options, while only 7%–12% of the companies in the other sectors use this approach.

At myStockOptions.com, we continually watch for new surveys on equity compensation, as we know how valuable these are to the stock plan professionals who routinely use our website. More recent survey data on stock comp is available in one of our most popular FAQs.