Emily Weinman
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Wednesday, June 15, 2011 BOARD COMPENSATION UP SEVEN PERCENT IN MIDDLE MARKET, BDO USA ANALYSIS FINDS HEALTHCARE BOARDS SEE LARGEST INCREASE DUE TO 72% JUMP IN STOCK-BASED PAY
Chicago, IL - June 13, 2011 - Director pay in the middle market is up seven percent, reflecting the increased responsibilities, time commitment, and regulatory issues - such as the Dodd-Frank Act - that boards face today. These factors, coupled with a rebounding stock market, have allowed companies to increase director pay to $110,155, up from $102,809 in 2009, according to an analysis of 600 companies conducted by BDO USA, LLP, a leading accounting and consulting organization. Much of this increase can be attributed to a greater use of full-value equity vehicles, which are up 22% from last year, indicating that the recovering stock market is adding to compensation growth overall.
The analysis continues to identify industry as the most important factor in benchmarking director pay in the middle market. Compensation by industry ranges from $50,000 for banking directors up to $149,000 for technology directors. Boards in the technology and energy industries consistently outperform their peers when it comes to pay, ranking as the top two industries since 2008. These industries are likely to remain some of the most highly compensated in the future because of continued high investor interest and high demand for seasoned talent. On the other side of the spectrum, banking and financial services retain their position at the bottom of the list, due to continued scrutiny and the "leveling off" effect of companies scaling back equity compensation grants in light of their historical grant practices and current market position.
"Companies are shifting away from cash compensation in favor of equity vehicles, continuing to focus on pay-for-performance while at the same time providing a level of cushion for attracting and retaining the most qualified board members," said Randy Ramirez, Director in the Compensation and Benefits Practice at BDO. "Throughout the recession, director pay did not match the significant increase in responsibility and commitment that most middle market boards had to take on. Our analysis shows that companies are now in a better position to remedy that."
These findings are from the most recent edition of The BDO 600: 2011 Survey of Board Compensation Practices of 600 Mid-Market Public Companies which examines the director compensation trends in publicly-traded companies with annual revenues from $25 million to $1 billion in the energy, health care, manufacturing, real estate, retail and technology industries; and publicly-traded companies with assets between $50 million to $2 billion in the banking and financial services industries. The study included proxy statements that were filed between 5/15/2010 and 5/15/2011.
Year-over-Year Industry Compensation:
| 2010 Average | 2009 Average | Median Change* | |
| Technology | $149,428 | $136,152 | 3.6% |
| Energy | $139,930 | $141,033 | 5.9% |
| Health Care | $137,601 | $121,743 | 13.3% |
| Real Estate | $119,685 | $104,612 | 2.3% |
| Manufacturing | $107,383 | $100,270 | 2.0% |
| Retail | $99,369 | $94,514 | 4.4% |
| Financial Services-Nonbanking | $77,022 | $74,121 | 0.2% |
| Financial Services-Banking | $50,824 | $50,025 | 2.0% |
*Percent change was calculated at the median to exclude outliers
- Further findings from the BDO 600 Survey of Mid-Market Board Compensation Practices:
- Directors at Larger Healthcare Companies ($650M-$1B) Receive Highest Comp Overall - The complexity of doing business in the healthcare industry has substantially increased in the last two years. With systemic changes affecting everything from the composition of private practice and integrated system care to regulatory changes, it's no wonder that healthcare companies have significantly increased full-value and stock option grants to both attract and retain the most qualified directors. In response to this, directors in the larger healthcare organizations are receiving $205,576 in total annual compensation, substantially higher than any other group.
- Real Estate Companies Focus on Stock Options - While more than 80% of the companies in the real estate industry do not regularly grant stock options, the remaining approximately 20% of companies substantially increased their grants, more than doubling the value on average. This is especially notable because the value of stock options for half the industries studied (energy, banking, healthcare and retail) decreased. Other increases ranged from six to 30 percent, nothing approaching the levels of Real Estate. The increase use of stock options among real estate companies using this vehicle can be attributed to the emphasis on director pay alignment and the view that the industry is starting to "turn the corner."
- Cash is King and Equity Takes Backseat for Bank Directors - Due largely to increased scrutiny and banks' desire to "level off" their equity grants in the latest performance year, banks strongly favor cash compensation for their boards. Cash makes up 72 percent of the pay mix, the highest of any industry and significantly above the average 46 percent. Consequently, their full value stock compensation was the lowest (27%) of any industry, compared to 54 percent on average.
- Small Bank Director Pay Trumps That of Larger Peers - Going against standard compensation trends, the study shows that the smaller the bank, the higher the pay for directors. At $72,981, small bank directorsare faring much better than their medium ($45,505) and larger ($36,163) middle market peers.In all other industries the opposite is true - pay increases with the size of the company. This is consistent with the public's perception that bigger banks have not been forthcoming with their operational issues. This may or may not be true, but with smaller community and regional banks' increased confidence linked to an increase in retail deposits, it has given smaller banks more leverage to attract and retain key boardroom talent.
- Pay Mix Varies by Company Size - The economic turmoil of the past three years has had a big impact on larger middle market companies ($650M - 1B), providing the catalyst for companies to renew and discover their competitive advantages. With this in mind it is not surprising that larger middle market companies are favoring full value stock this year, comprising 42 percent of the pay mix, up 31 percent from last year. Smaller companies, on the other hand ($25M - $325M), have benefited from their size by being able to rapidly implement changes in their operations, which has resulted in increased company performance from the previous year and an influx in cash. As a result, smaller companies are more heavily weighted towards stock options, with 23 percent of compensation residing here as opposed to 17 percent for medium ($325M - $650M) and 16 percent for large companies. In general, compensation packages are reflecting the reassessment of and changes to overall operations. Companies that were awash in cash have sent the message that pay will be more linked to a company's long-term performance.
About BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,082 offices in 119 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.