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Compensating Your Board of Directors

Family business consultants like myself often urge family firms to create a board that includes not only family members but also some knowledgeable, experienced, independent outsiders.

But what to pay directors, if anything, is an issue that frequently confounds family businesses.

“Should we compensate our directors? Or should we find people who are willing to volunteer their time?” clients often ask me.

It may possible to find retired business people who are eager to serve on boards as unpaid volunteers. But I find that my clients favor compensating directors.

It’s hard to find qualified people.  Serving on a board takes a great deal of time and effort. What’s more, they want people who will challenge management. They also know that sometimes a single piece of advice from one director can save a company hundreds of thousands of dollars.

The trick is to determine what is fair and adequate compensation. That depends on many factors: your industry, the size of your business, your location, and so on. If you are situated in large city, for example, you can expect to pay more than if you are in a small community.  If hyou are targeting directors who are senior executives in large businesses, you will need to pay more than if you seek directors whose experience is in smaller enterprises.

Here are some guidelines you may consider useful:

Consider what goes into board compensation. Many family firms follow the lead of public companies, paying an annual retainer to directors plus a fee for each board meeting they attend. Directors may receive additional compensation for service on particular committees.

Budget for attendant costs. Figure in transportation costs for directors as well as per diem expenses. Also consider getting directors’ and officers’ liability insurance (“D & O”), which provides board members some protection for the actions they take. It is generally affordable and it goes a long way toward helping you attract qualified directors.

Develop a policy on board compensation and put it in writing. This policy should address the family’s values. Some families believe that only outside directors should be compensated. If you’re a family member on the board, they reason, that’s part of your stewardship and you shouldn’t be paid.

Other families tell family members, “We’re placing you on the board because you’re qualified and you should be compensated the same as an independent director.”

Employees of the company who also serve on the board typically are not compensated extra for their board service.  Their regular compensation is considered sufficient to cover the responsibility as part of their regular job.

Do the research. Check with local and regional resources—such as trade organizations or your chamber of commerce—to see if they have information on what others in your industry are paying directors. Another source is the National Association of Corporate Directors (http://www.nacdonline.org/ or 202-775-0509), which publishes an annual survey on board compensation for companies ranging from $50 million in annual sales to more than $10 billion.

Some families believe a director is worth as much as their top executive. They determine compensation by calculating what that executive’s salary would be on a per diem basis and multiplying that figure by the number of days a director is expected to work for the company.

Know what you expect for your money. A board should ensure that management is doing all that can be done to run the business effectively, giving good return to the shareholders and making sure that their values are reflected in the business.

Be transparent. Directors are the representatives of and should act on behalf of the shareholders. Shareholders should know what board members are paid.

Understand directors’ motives for serving.  We find that the best outside directors are not serving primarily for the money.  They like the challenge, the learning and have a sense of “giving back.”  Pay should be generous enough to honor and recognize their contributions.

Look for a return on your investment. Your initial reaction may be that directors cost more than you can afford. But maybe not. Writing in The Wall Street Journal recently, Donald E. Graham, chairman and CEO of the family-controlled Washington Post Co., reflected on the benefit of having investment guru Warren Buffett on the company board. “Mr. Buffett’s recommendations to management have been worth—no question—billions. His value to any company’s board is incalculable,” Graham said.

It may help to think of your board as an investment and to consider the value of its return to your business—and to your family’s peace of mind.
 

 

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