Last week, Equilar* released two findings that public companies should consider when evaluating the compensation their directors receive. First, a high percentage of shareholder-approved plans now include limitations on either plan awards to directors, or their total compensation. This is being done in the face of a very real risk springing from Delaware court decisions that have encouraged shareholder derivative litigation alleging that director compensation is excessive. However, shareholder-approved limits will enable companies to avoid costly litigation only if those limits are found to be reasonable.
That leads back to the Equilar study, because a second notable finding appears within a table showing that plan-imposed dollar limits on director compensation have skyrocketed compared to median director pay. While a limit reflecting a low multiple of current director compensation would seem safely reasonable under the case law, the issues are more nuanced and the best companies make these decisions only after thoughtful deliberations that are based on survey data and consideration of alternatives such as whether a limit should apply to plan awards or total compensation, and how best to express any limit (or limits). Overall, for any public company that may propose a new or amended stock plan for shareholder action in 2017, we strongly recommend consideration of a plan-imposed limit on director compensation.
* Equilar’s study appears here.