In privately-held businesses, board member risk is not as great as it would be in a public company. As a result, private company board members usually receive lower retainers than public company directors. However, there is still a level of risk and an expected time commitment for which board members must be compensated. We interviewed Tyler A. Ridgeway, Director, Human Capital Resources, for the March issue of Insights from Kreischer Miller about how to adequately compensate board members for their contributions.
What general factors should be considered regarding private company board member compensation?
Board member compensation should take into account roles, responsibilities, time commitment, seniority/experience level, geographic location, and committee involvement. For example, if you are looking to your board members for strategic guidance and advice, this can result in activities that generate a lot of profit for your business. It’s important for businesses not to overlook these factors.
Are there specific guidelines for compensation?
While there are no specific compensation guidelines that apply to all businesses, at a minimum you will want to consider:
- How many times per year do you meet? Most companies base a yearly retainer on the number of meetings. Each meeting might pay anywhere from $2,500 to $5,000. Accordingly, if you have four company board meetings each year, you might be looking at an annual retainer of $5,000 – $10,000 and $10,000 – $20,000 per board member.
- Is committee work involved? Board members usually receive additional compensation for service on committees.
- What is your company size? Larger companies generally provide higher compensation to their board members.
- Do you have business challenges that necessitate higher-level experience? Individuals with deep expertise generally command higher compensation. For instance, we once completed a search for a business that was seeking a Fortune 500 executive to join their board. The business was prepared to offer higher compensation to gain his strategic advisory services.
- Are there other methods of compensation you can offer besides cash? Some businesses get creative, even offering company stock. For example, we have a client that created a pension plan for board members that vests after five years of board service.
How should I compensate family board members?
In a family-owned business, determining how to compensate family board members can be tricky. As a general rule, we advise companies to treat each board member the same.
However, we work with many business owners who feel that only outside directors should receive compensation. They believe that as a family member, it is your duty to serve the company and you have an inherent, vested interest in the outcome.
Keep in mind, though, that family members who are paid employees of the company do not usually receive additional compensation for their board service.
It’s very important to note that while fairly compensating your board members for their service is essential, paying more money might not necessarily lead to better advice. We have found that the most successful board members are those who have a passion to serve (i.e., they’re not just in it for the money). Look for individuals who want to make a positive impact on your business and demonstrate a vested interest in your long-term success.●
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