Navigating Board Compensation
By Jocelyn Mangan, CEO of Him For Her and Kate Purmal, COO of Illumyn
Over the years, I’ve heard conflicting comments when it comes to board compensation, namely: “Don’t take board roles for money reasons,” and “People don’t take these roles out of the goodness of their hearts.”
Turns out, there’s a little bit of truth to both of these comments that we will attempt to demystify below.
When you join a for-profit board, you will receive some type of compensation for your board service. This varies widely amidst public and private companies and even within the private company space.
The Basics: Cash and Equity Board Compensation
Board compensation is typically structured around cash and equity components. Cash compensation can involve meeting fees, annual retainers, and travel reimbursement. Equity compensation includes company stock, stock option grants, or restricted stock units (RSUs).
Public vs. Private Company Board Compensation Insights
In public and larger private companies, committee chairs, committee members, lead directors, and non-executive chairs often receive cash compensation in addition to an annual retainer or per-meeting fees. Information about director compensation in public companies is readily available and published in annual proxy statements and Form 10-K filings.
Public company boards can be very lucrative. According to data from Spencer Stuart, the average total compensation for S&P 500 directors in 2022 stood at $316,091.
Private company board compensation is more difficult to discern due to the lack of mandatory public disclosures. Director compensation for private companies also varies greatly based on the size and stage of the company. Moreover, compensation structures can differ significantly based on whether the company is venture capital (VC)- or private equity (PE)-backed.
VC-Backed Company Director Compensation
In the early stages of VC-backed private companies, board directors might receive equity compensation exclusively. Stock grant awards can be annual or tied to director appointments, with varying vesting schedules. Given the inherent business risks and ambiguity surrounding valuations, evaluating the worth of equity compensation can be challenging. Thus, deciding to join an early-stage company board opportunity comes down to making a bet on the CEO and the business. As companies progress to later stages, both cash and equity compensation come into play.
A study by the Harvard Law School Forum on Corporate Governance serves as a valuable benchmark for private board compensation. The 2022 study reveals that the median annual cash compensation was $30,000 for private companies. This amount ranged from under $20,000 for companies with less than $50 million in annual revenue to an average of $65,000 for companies generating over $1 billion in annual revenue.
PE- Backed Company Director Compensation
When PE firms invest in a company, they pursue significant growth with a near-term goal of liquidity, such as an initial public offering or M&A event. The directors of PE-owned companies mainly focus on strategies to increase investor value and may operate within a much shorter time horizon than other private or public companies.
Outside directors for PE-backed companies are generally paid by the PE fund owner, with cash compensation similar to other private company directors. In many cases, the equity component for PE-backed outside directors can provide significant value upon exit. A 2021 study by Notch Partners found that 28% of outside board members were expected to make between $500K and $1M in equity, and 21% between $1M and $3M in a typical base case return scenario.
Navigating Compensation Negotiations
Unlike executive compensation, board members often do not actively negotiate their compensation. If you're the first independent director, you may have a role in negotiating your compensation. If you’re not, your compensation is typically aligned with what other independent directors receive. Compensation reviews are conducted periodically, especially in later-stage and public companies, often with the guidance of compensation consultants.
The exception is for PE-backed company boards. The Notch Partners study reveals that about a third of PE-backed companies reported customizing board compensation to the individual.
If you are in a position to negotiate your board compensation, we recommend you reach out to your network and to our team at Him For Her to gather data about typical board compensation based on the stage and revenue of the company.
In summary . . .
When people say not to take board roles for the money, they're likely referring in part to the reality that a significant portion of compensation often comes in the form of equity, which may lack immediate liquidity. And, although public company equity is liquid, most public companies require directors to retain a significant portion of their equity holdings. This practice ensures their commitment to the company's long-term success, aligning their interests with the interests of other shareholders.
It’s important to recognize that your contribution plays a significant role in governance and oversight for the company, and board service can also contribute significantly to wealth creation. We project that achieving diversity over the next 10 years by extending board service opportunities to 11,000 women and underrepresented individuals of color will yield wealth creation in excess of several billion dollars annually.
