It’s not easy being an independent director on a Board these days. The time demands are greater, and an ever-higher level of specific expertise is required to serve on various committees and inform decision-making. The potential risks have escalated too, whether it is legal liability or more generalized scrutiny into Board effectiveness. In response, companies are changing their pay practices to attract individuals prepared to take on the more challenging roles and compensate them appropriately given the new demands.

Various elements of the director value proposition can be incorporated into the design of a director compensation program by anchoring the plan design in a set of coherent, well-defined guiding principles. Guiding principles for directors should be similar to those developed for executive pay, but driven by different sets of needs and expectations. For example, guiding principles might allow a Board to determine, among other things:

• The prominence of pay.
• The degree to which market practices will influence director compensation.
• Desired pay positioning compared to relevant comparators.
• Pay differentiation among directors.
• Mix of cash and equity compensation.
• Expectations regarding director stock ownership.
• The extent to which director compensation design needs to change as a company’s business situation evolves.

In much of our recent work with Boards and Governance Committees, we have found guiding principles to be an excellent foundation for designing and implementing director compensation programs, and for communicating the intent of these programs to external constituencies. Establishing principles to address specific pay program components will ensure that decisions about director compensation are made thoughtfully, holistically and accurately.

For more information on the topic, refer to “Director Pay: The ‘Why’ Behind the ‘What’” and “Trends in Director Compensation.”