Who Determines the Salary of Board of Directors: A Comprehensive Guide

The salary of a company's board of directors is typically determined by the board itself, often through a compensation committee. This process involves a multifaceted approach that balances industry standards, company performance, and the specific roles and responsibilities of the directors. In many jurisdictions, shareholders can vote on executive compensation packages, though the primary decision-makers remain the board and its compensation committee.

Compensation Determination Process

The board of directors and its compensation committee play a critical role in setting the salaries of directors. The committee usually consists of independent directors who evaluate compensation packages based on a variety of factors, including industry standards, company performance, and the roles and responsibilities of the directors. The process is designed to ensure that the compensation aligns with the company's goals and the expectations of shareholders.

Directors' Compensation Structure

Directors do not actually receive a salary in the traditional sense. Instead, they are compensated through a mix of meeting attendance fees, monthly retainer fees, and stock-based compensation. Meeting attendance fees are a common form of compensation, as they are typically decided by the board and then ratified at the Annual General Meeting (AGM).

Some companies offer additional monthly retainer fees to directors in recognition of their ongoing contributions. Stock options are another form of compensation, providing a long-term incentive aligned with the company's performance. In some cases, the Chairman of the Board may be entitled to a company-maintained car for additional responsibility, but this must also follow the same approval procedures as any other compensation package.

Shareholder Influence

While shareholders do not directly set the salaries of board members, they do have an indirect influence through their voting power and engagement. In many jurisdictions, shareholders can vote on executive compensation packages, and they may express their opinions through various channels, such as proxy statements and shareholder meetings. This ensures that board compensation remains aligned with shareholder expectations and the company's overall performance.

U.S. Public Company Perspective

In the context of U.S. public companies, the process of determining board compensation is somewhat unique. The board itself determines its compensation, which might seem peculiar at first glance. However, it is important to understand that directors are not employees and do not receive salaries as such. Instead, they are compensated by a cash remuneration and/or stock-based compensation, and their expenses, such as travel, are typically reimbursed.

Board members can be part of various subcommittees, such as the compensation committee, corporate governance committee, and the audit committee. They receive compensation for attending meetings of these committees. Additionally, one independent director usually serves as chairman of a subcommittee and receives compensation accordingly.

The self-determination of board compensation by the board itself is a legal and practical reality, given that there is no higher authority or corporate governance body to set it for them. It is a process designed to be transparent and in line with the company's goals and shareholder expectations. The ultimate goal is to ensure that board compensation is both fair and aligned with the company's and shareholders' interests.

Logically, the compensation will be compared to 'peer' companies to ensure that it is in line with current market conditions. This process helps to maintain balance and fairness within the industry, ensuring that board members are compensated appropriately for their roles and responsibilities.

In summary, while the board, particularly the compensation committee, sets the salaries, shareholders have an indirect influence through their voting power and engagement. The system is designed to maintain transparency and fairness, ensuring that all parties are aligned in the best interests of the company.