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Director Pay: The Next Wave of Reform?

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June 14, 2018 | Jennifer Namazi

Director Pay: The Next Wave of Reform?

There have been periods of time where it seems there are waves of enforcement actions (e.g. by the SEC) and/or litigation activities around a particular area of stock compensation or its periphery. We’ve seen it with insider trading, proxy plan proposals, and now the latest wave appears to be aimed at non-employee director compensation. There have been some key litigation outcomes recently that seem to be creating momentum in successful shareholder litigation over director pay.

A number of law firm and compensation blogs detail the particulars of these cases, so I won’t summarize them all here. If you want to delve more deeply into the nuances, I suggest taking a look Michael Melbinger’s blog on CompensationStandards.com.

Some things to consider in evaluating whether director pay practices at your company could present risk of a lawsuit (I’m not a lawyer, and this list is not comprehensive, so please check with your own advisors to truly measure risk):
  • Does your company benchmark non-employee director pay against those of peer companies? If not, Melbinger suggests doing so. It seems that having data on director compensation practices among peers would be data most companies should or want to have anyway.
  • If the plan allows directors to approve their own grants within broad terms (for example, within a “reasonable limit” or “reasonable amount”), rather than specifying a numeric limit, be careful in identifying where that “reasonable” line falls. At what point could compensation be perceived to have crossed that line?
  • If you gasp when you see the amount of compensation (equity, cash, or a combination of compensation) proposed to a director, your shareholders will likely gasp too. As Melbinger points out, anything that feels too high to justify probably is too high to justify.
Now it the time to have conversations and take action around the mechanics and optics of director pay. It seems this is the next litigation trend in our world of equity (and executive) compensation. Avoiding litigation isn’t the only reason to take action – it’s just good business practice to take a look at director pay and look for improvement opportunities – in pay structure, approval processes, and how the overall compensation is likely to be received by shareholders and other interested parties.

-Jennifer

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