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Director Compensation Compared to CEO Compensation
One 'cross check' on board compensation is to compare it to CEO compensation.
This makes sense because one of the ideal requirements of good directors is "they have been the CEO, COO or CFO of a successful similar company."
A large part of the boards job is to mentor, and coach, the CEO. The best directors are ones that have ten or twenty years more experience than their CEO's doing a similar job. For most successful people's careers, that additional decade, or two, of experience adds significantly to value and compensation.
Another important factor to consider is that whenever a company 'purchases' a small amount of a senior person's time, is that its more expensive per hour for a part time contribution than a full time one. There are several reasons this is fair. The part time senior person, even if they are only contributing a day a month, is still:
- providing the benefit of 100% of their experience and knowledge
- 100% of their reputation, relationships and contacts
- assuming risk to 100% of their net worth and reputation
- often having to pay significant overhead costs for their office, IT infrastructure, etc.
This is the largest reason that lawyers, accountants and consultants get paid significantly more per hour than CEOs.
On average, all of this together means that director compensation per unit of time is fairly valued at about the same, to about double, that of the CEO. The best way to be comfortable with this is to simply look around the boardroom table. It's often the case, in an angel backed company, that if someone who was a really good director was recruited to be the full time CEO it could cost double what the typical first time, or second time, CEO was fairly compensated at. (This is almost never possible, but its a good check.)
For a mid sized company - market cap around $10 million to $50 million - CEO compensations are in the range of $100,000 to $300,000 cash per year with total equity in the range of 5 to 10% of the outstanding (assuming a non-founder.)
The time requirement to be an active director of a high growth company can easily be two or three days per month. This is roughly 10% of full time. Again, making a rough approximation, it's fair that a director be compensated at about 10% to 20% of what a CEO would make.
Using this approximation, a director's cash compensation in the range of $15,000 to $45,000 per year is reasonable.
Similarly, a 0.5% equity allocation per year, vesting, is also reasonable compared to a CEO's compensation. Of course, this depends a lot on the rate of dilution for the particular company.
For an active Chair, or audit committee chair, the time commitments and numbers above are typically 50 to 100% higher depending on the degree of involvement.
Taken in aggregate, this means that the total board compensation is similar to the CEO's compensation.
Roger Gurr is a an expert in board director, management and executive compensation and is a frequent speaker at conferences and seminars. He speaks on director compensation annually at the BC Directors Club breakfast. At his presentation on December 14, 2006 he provided the following data and rules of thumb:
"The total compensation for all directors approximates the CEO compensation if the number of directors is reasonable."
A link to Roger's presentation is available here.
Mike Volker, a well known Angel Fund manager wrote an article on director compensation that included this rule of thumb. A link to that artilce is also available here.
