After my clients ask “How do I get on boards?”, they usually want to know “How much do boards pay?”. Board of directors compensation is on every aspiring director’s mind, even if she won’t freely admit it.
Let’s begin with a cautionary word. If you are interested in board service because it appears financially lucrative, you may be disappointed. At least in the short term, directors are not richly compensated for the time spent, risk assumed, and value created. I am very secure in my decision to become a corporate director, but it’s not about the money.
Part of this caution relates to the number of hours one works as a director. In a recent study by Korn Ferry, Canadian directors reported working 304 hours per year on each board. This is directionally consistent with the 236 hours US directors averaged in 2013. Regardless of one’s geography, directors are dedicating an increasing amount of time to the organizations they serve. As their commitments intensify, there is a general impression among directors that compensation has not kept pace.
With that out of the way, let’s pull back the curtain on 5 types of boards and what they pay.
Non-profit boards: An invaluable training ground
Before we land a seat on a paid board, most of us volunteer our time. As I mentioned in a past post, service on these boards might even cost you financially. Fortunately, these opportunities can be incredibly rewarding. I can think of no better way to learn governance, build a network, and make a positive difference.
The boards of non-profits are unpaid in the vast majority of cases, but there are some exceptions. Certain organizations marry non-profit status and complex business operations requiring intense oversight. For example, AAA is a non-profit that supports 54 million members on North American roads and highways. Directors serving on AAA regional boards might earn $35,000 or more for the time they spend overseeing thousands of employees and significant investment portfolios. It can pay to do your research before dismissing a non-profit board invitation!
Advisory boards: A gateway to investment opportunities
Some advisory boards offer a small stipend, but one should be prepared to offer free advice, especially for new start-ups. It is reasonable for the organization to cover an advisor’s out-of-pocket expenses (e.g., travel) and proactively help the advisor in non-financial ways (e.g., professional introductions).
In terms of financial upside, an advisory board can provide a gateway to lucrative investment opportunities. For example, Wharton professor David Bell served as an early sounding board for the founders of Warby Parker. He is now an investor in the company and has built an advisory/investing portfolio of other retail disruptors. In my experience, being a part of an organization’s early trajectory is a privilege that I wouldn’t trade for director’s fees.
Co-operative boards: Transparent compensation reporting
I serve on the boards of two co-operatives: MEC and Meridian Credit Union. At the risk of exaggerating, I love every single minute on these boards!
Co-operatives tend to be transparent about what they pay their directors. There are no hard and fast rules, but you can expect to earn anywhere from $30,000 to $60,000 annually when serving on the board of a large, complex co-op.
To get a more concrete sense of this market, consider the following examples: REI, Coast Capital, and Calgary Co-op (page 7 here). For your reference, Wikipedia offers an exhaustive list of cooperatives around the world.
Private equity and venture-backed boards: Fees and options that test independence
Director fees in this world are not disclosed publicly, perhaps not even to the funds’ investors. I know of one PE director who earned six-figures as chair of a PE-backed company, but something around $30,000 appears more common.
The real financial upside with these boards lies in equity participation. Independent directors may be included in a company’s long-term incentive plan. These grants of options or shares can yield significant payouts that far exceed director fees. I would not be surprised to see an independent director walk away with a $300,000 after working with a company over a 5-year investment horizon.
At the 2005 Berkshire Hathaway annual meeting, Warren Buffett called out the potential conflict created by director compensation:
“I’ve been on 19 boards and I’ve never seen a director who needs the money oppose an acquisition or executive compensation. They just don’t behave as if they own it.”
With this in mind, some PE/VC boards ask directors to invest directly in the company. This aligns the directors’ incentives with those of the fund and preserves their independence from management. I have to admit that I move more decisively after I’ve written a cheque.
Public companies: The promised land of board compensation
In 2012, directors at S&P 500 companies earned an average of $251,000 for 250 hours work. This figure concealed an enormous range, spanning $3,800 for Berkshire Hathaway directors to seven figures for some on the Costco board. On average, top Canadian directors received more modest compensation, averaging $87,908 in fees.
A recent study by the Rotman School confirms suspicions that director compensation increases with company size. Two smaller issuers in the data set paid directors $40,000 and $53,000, respectively. Those overseeing larger companies averaged $140,000 in director fees, but were less likely than their smaller peers to receive option grants.
Regardless of the geography, those working with private and publicly traded companies will be expected to invest a few years of director fees back into company stock. A new director must be comfortable waiting out this period without a pay cheque. It helps to have a day job or lively consulting business to help sustain one’s cash flow.
Board of directors compensation is a hot topic today and for good reason. As the supply of leaders pursuing board service grows, the market is bound to feel downward pressure on compensation. Organizations will find, however, that top talent expects to be paid fairly in exchange for the increasing workload and risk. Ultimately, a great director contributes far more to an organization than he receives in exchange, whether measured financially or by other metrics.
Question: What about this summary of the market surprised you?
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