Director compensation has changed significantly over the past few years. While specific data, especially for early and mid-stage companies, remains limited, compensation levels are widely believed to have increased severalfold since the corporate governance issues of the late 1990s.
Why Director Compensation Is Increasing
Several factors are driving the rise in director pay:
- Increased Importance of Boards: Boards play a more strategic role in shaping company direction.
- Time Commitment: Directors now face heavier responsibilities and time demands.
- Heightened Liability: Legal risks for directors have risen substantially.
- Reduced Insurance Coverage: Director and officer liability insurance offers less protection than it once did.
- Recruitment Challenges: Attracting and retaining qualified, engaged directors is becoming more difficult.
Director Compensation by Company Stage
Early-Stage Companies (Startup Phase)
Most startups compensate directors purely through equity, which is ideal for preserving cash and aligning incentives among founders, directors, and investors.
Best Practice:
Reserve around 10% of fully diluted shares for the board, typically after the third round of financing (often the second angel round). This is roughly equivalent to what might be allocated to a non-founder CEO and about double the standard 20% employee equity pool.
Mid-Stage, Angel-Backed Companies
For companies valued between $10 to $50 million, director compensation often evolves to include both cash and equity. The mix reflects a balance between affordability and the increasing demands on directors.
Public Companies
Public companies bring greater exposure and regulatory compliance responsibilities for board members. Consequently, compensation increases accordingly:
- Cash compensation is generally 50% higher than for comparable private companies.
- Equity compensation typically remains consistent due to limits on issuing new options.
Notably, CEOs do not receive additional compensation for serving as directors—the role is included in their overall executive package.
Current Compensation Benchmarks
For early-stage companies where equity is the sole form of director compensation, standard initial grants are:
- Outside Director: 1.5% to 2.5% of fully diluted shares
- Active Chairperson: 5% to 6%, depending on additional contributions
These percentages are calculated around the third funding round. Equity should follow standard vesting schedules, just like employee options.
Managing Dilution
Equity stakes naturally decline as the company raises more capital. To maintain alignment and motivation, boards often issue additional equity or options to directors and management. Compensation models must factor in evolving dilution scenarios to preserve fair and effective incentive structures.
Annual Director Compensation Summary
The table below summarizes current norms for annual director compensation among mid-stage private and public companies:
| Role | Private Companies | Public Companies |
|---|---|---|
| Cash | Equity (per year) | |
| Outside Director | $15,000–$25,000 | ~0.5% of shares |
| Chairperson | $25,000–$35,000 | ~1% of shares |
Note: Equity is usually granted in full when the director joins, with a four- to five-year vesting period. This front-loaded allocation helps minimize dilution by setting the option price early.
Comparing to CEO Compensation
Director compensation can also be evaluated relative to CEO compensation. A commonly used model allows direct comparison based on equity and time commitment metrics. While not included here, such models help contextualize fairness and competitiveness in board-level pay structures.