Every once in a while, a newspaper or a business magazine publishes an article exposing overinflated salaries of board members. While it may be true for some big corporations, the same cannot be said for the rest. Companies have different options on how to compensate their board members other than handing over a colossal sum of money or equity in the company.
There are two major ways companies compensate their board members; either through equity or cash compensation. It is important that a company compensate board members in a manner that promotes their long-term interests and goals. We had an in-depth discussion with some well-experienced board members, and examined the pros and cons of both ways of compensating advisory boards or board of directors compensation.
Compensating with Equity
While researching her book, Marissa Levin, an expert on boards, came across a long-standing attorney and compensation expert. There are four different ways to use equity as board member’s compensation and according to this compensation expert: “Never give more than one quarter to one half of one percent to each board member you have.”
A hazard of compensating with equity arises when board members leave the company. Marissa advises, “Put in a one year agreement with a restricted stock clause that allows you to buy back that stock, basically at a penny, in the event that you roll off that board.” Because the last thing a company wants is to give a large portion of equity to somebody who only works part-time for them. And if that board member doesn’t work out, then the company has someone walking around outside the company who owns a large portion of stock with no interest in the organization.
Another thing for companies to consider is that you should be very prudent with the stock. This is something start-ups should especially consider because they usually have very little revenues so they cannot pay the board member very much or at all and, as a result, allot 5- 6% equity as the board member’s compensation.
Although initially that might not seem to be a big amount, but as the company grows that small percentage can amount to a large sum. Like Marissa says, “If you build a company to $5, $10, $15, $20, $30, $50 million dollars, that’s a lot of money to be giving to somebody basically ‘cart blanche’.”
Jeff Thompson has served in the board of directors for 10 years at Edelbrock Corporation. He was also a member of the executive, compensation and audit committees. Talking about compensating public board of directors, Jeff explained that they do things a bit differently.
“We paid every member a fee for the quarterly meeting. It wasn’t a large amount of money but we also covered all their expenses,” said Jeff. The expenses included travel expenses, as the company had people coming in from all over the country.
An additional perk that public boards had was a small pool of stock for the board members, which amounted to 1-2% of the company. The money was vested over a 5-7 year period to ensure long-term loyalty from its board members. Jeff said, “In order to earn the stock, you had to have long-term plans and goals with the company. So if you left early, you didn’t get much of anything.” In the event a board member rolled off the board due to term limits, since they had earned that investment, they would have the right to either to keep the stock or sell it back to the company.
It’s important that you let go of board members in a way that doesn’t leave hard feelings between either party. Marissa said, “The most important thing you can do is keep the doors open and never burn any bridges because you don’t know if you might want them back at some later date or they could refer you to another advisor.” In her company, she sets up an ‘exit interview’ to make sure that there is closure in a professional manner so that everybody feels good about the experience.
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