Director Compensation - Plan Limits and Shareholder Approval

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As discussed under Director Compensation Litigation (with links to cases), two Delaware decisions - notably 2012's Seinfeld v. Slager and 2015's Calma v. Templeton (re Citrix) -- have opened the door for shareholder derivative litigation alleging excessive director compensation. Both decisions refused to dismiss such claims, holding that the highly-deferential business judgment rule did not apply because directors are self-interested in their compensation.  That standard would have applied, however, if directors had set their compensation within a "meaningful" limit that had previously received shareholder approval, per In re 3COM Corp. S’holders Litig., No. C.A. 16721, 1999 WL 1009210, at *1 (Del. Ch. Oct. 25, 1999), as amplified by subsequent Delaware decisions. See the entry below for 2016.Oct.30 re "meaningful" limits.

In response, it is becoming common for public companies to include a limit on director compensation when they propose new equity award plans for shareholder approval.  See Director Comp Survey Data for a recent report that 3% of Fortune 500 companies have received shareholder approval for a total pay limit, with 25% of stock plans including a dollar or number limit on awards to directors. See this Frederic W. Cook Survey from Nov. 2016 for these well-taken insights supported by survey data:

  • In response to recent shareholder lawsuits regarding the reasonableness of director pay, an increasing number of companies have been adding annual limits on director compensation to shareholder-approved equity plans to mitigate the risk of litigation. Roughly one-third of companies in this study have such limits, and we expect this percentage to grow, as many companies are waiting to implement this feature until they bring the applicable plan to shareholders for normal-course re-approval. To enhance protection, these limits are increasingly covering total pay rather than just equity; among the sample, 30% of limits proposed in 2016 cover total pay, versus just 4% of limits proposed prior to 2016. Among the companies in this study, limits on total pay typically reflect a multiple of two to three times annual total pay. Despite this emerging trend, most companies utilizing limits cover only equity compensation per director.


2019.11.16  Survey Data and Table. Under the heading Annual compensation limits, WillisTowersWatson presents excellent data supporting this summary (quoted here from its report):

  • The number of companies with an annual compensation limit continued to grow (63% vs. the previous 55% of the index). There were 16 newly-established limits in the 2019 S&P 500; of these new limits, three-fourths were created as a combined fixed value cash and equity limit. Additionally, there were 18 compensation limits updated in the most recent fiscal year. Seventy-five percent of those updated limits were changed to include cash compensation as part of an overall compensation limit. That information correlates to Figure 3 below, which shows combined fixed-value based cash and equity limits are in greater use. Four-fifths of companies now maintain a value-based limit (up 3% from last year’s 77%). The remaining 20% of limits are share-based. The values at the median continue to hold steady.

2016.Oct.30  Equilar Data Highlights "Meaningful Limit" Risk.   As the following quote indicates (from this Equilar survey), more and more plans are including shareholder-approved limits on director compensation. Those limits need to be reasonable, however, in order to defuse litigation risks alleging directors paid themselves excessive compensation. Companies may need to be more careful about the limits they choose, because the Equilar report includes a table showing that plan-imposed dollar limits on director compensation have skyrocketed compared to median director pay.  In general, shareholder-approved limits should reflect consideration of independent survey data focused on total director compensation. A limit reflecting a low multiple of current director compensation (2x to 3x per this Reuters article) would seem safely reasonable under the case law, but the issues are more nuanced and the best companies make these decisions only after thoughtful deliberations that are carefully recorded.

  • "According to an Equilar study, 80% of companies in the S&P 100 proposed or amended an incentive plan involving directors in proxies filed between January 1, 2011 and September 30, 2016. Of those companies, 28.8% explicitly mentioned a dollar value cap on director awards, and more than half of these dollar value caps were disclosed in a proxy filed in 2016."

2015.Dec.16  Jacobs Engineering - proxy statement's proposed amendment to 1999 Outside Director Stock Plan:
Notwithstanding anything to the contrary herein, no Outside Director shall receive in excess of $600,000 of compensation in any calendar year, determined by adding (i) all cash compensation to such Outside Director and (ii) the fair market value of all Awards granted to such Outside Director in such calendar year, based on the fair market value of such Awards on the Grant Date (as determined in a manner consistent with that used for Director compensation for proxy statement disclosure purposes in the year in which the Award occurs). The foregoing limit on Outside Director compensation only applies to compensation for customary Board services, and does not apply to compensation for special Board services, e.g. chairing the Board, which shall be subject to the limit set forth in the next sentence of this paragraph. The Board may make exceptions to this limit for individual Outside Directors in extraordinary circumstances, so long as this paragraph would not be violated if the $600,000 figure were instead $750,000, as the Board may determine in its sole discretion, provided that the Outside Director receiving such additional compensation may not participate in the decision to award such compensation or in other contemporaneous compensation decisions involving Outside Directors. 

2015.Jun.08  Caladrius - proxy statement's proposed 2015 Equity Incentive Plan:

  • Notwithstanding anything to the contrary herein, the maximum number of Shares that may be subject to Awards granted to any non-Employee Director in any calendar year shall not involve Awards having a fair market value exceeding U.S. $200,000, with such dollar limit being (i) adjusted from time to time to reflect changes in peer group practices, and (ii) applied to the sum of the fair market value of such Awards on the Grant Date (as determined in a manner consistent with that used for Director compensation for proxy statement disclosure purposes in the year in which the Award occurs) and all other cash compensation that the non-Employee Director receives for routine services on the Board during such year. The foregoing limit on Director compensation only applies to compensation for customary Board services, and does not apply to compensation for special Board services, e.g. chairing the Board.


2017.04.10  Director Pay Litigation - Dismissed due to Plan Limit.  In a comprehensively reasoned decision, Delaware's Chancery Court has endorsed the following plan provision as a shareholder-approved limit that would result in the high level of judicial deference -- afforded under the business judgment rule -- to equity awards directors made to themselves within that limit:

  • "[t]he maximum number of shares of Stock that may be covered by Awards granted to all non-Employee Directors, in the aggregate, is thirty percent (30%) of the shares authorized under the Plan all of which may be granted during any calendar year."

See Director Compensation Litigation under 2017.04.10 for further discussion of the In re Investors Bancorp case, including precautions boards should take when taking actions that relate to their compensation. 

2016.09.09  Settlement of Citrix Director Compensation Litigation.  Law360 reports that a Delaware Chancery Judge approved the settlement of shareholder derivative litigation under which Citrix agreed to limit annual stock awards to directors to $795,000 (roughly two times the highest past levels). Further info atDirector Compensation Litigation.

2015.  Intel - proxy statement's proposed amendment of 2006 Equity Plan provision: 

Each year, each non-employee director may be granted awards for a number of shares established by the Board, but the number of shares subject to such awards may not exceed 100,000 shares each fiscal year. This limit is subject to adjustment to reflect stock splits and similar changes in Intel’s capitalization. Subject to limits in the plan terms, the Board has the discretion to determine the form and terms of awards to non- employee directors. Our current practice is to grant each non-employee director a mix of RSUs and OSUs each January with target value of approximately $220,000.

2015.Apr.27  GoPro - proxy statement's proposed Equity Plan provision:

The aggregate number of Shares subject to Awards granted to a Non- Employee Director pursuant to this Section 12 in any calendar year shall not exceed 1,000,000.

2015.Apr.22   Walmart - proxy statement's proposal for 2015 Stock Incentive Plan:

Notwithstanding the foregoing, no Non-Management Director may be granted a Plan Award denominated in Shares with respect to a number of Shares in any one Fiscal Year which when added to the Shares subject to any other Plan Award denominated in Shares granted to such Non-Management Director in the same Fiscal Year would exceed a Share value of $500,000; provided, however, that if the Performance Period applicable to a Plan Award granted to a Non-Management Director exceeds twelve months, the $500,000 limit shall apply to each 12-month period in the Performance Period. For sake of clarity, the $500,000 annual limit on Shares subject to any Plan Award granted to a Non-Management Director applies to Options granted under Section 6.1, Stock granted under Section 7.1, Restricted Stock granted under Section 7.2, Restricted Stock Units granted under Section 8.1, Stock Appreciation Rights granted under Section 9.1, and Performance Units granted under Section 10.1, but shall not include any Shares granted in lieu of cash compensation earned by a Non-Management Director or any Shares received by a Non-Management Director in settlement a Plan Award pursuant to Sections 6.3, 7.4, 8.3, 9.5, and 10.6.

2015.Apr.10  Wintrust Financial - proxy statement's proposed 2015 Stock Incentive Plan:

The aggregate grant date fair value of shares of Common Stock that may be granted under the Plan during any fiscal year of the Corporation to any Director shall not exceed $300,000; provided, however, that (i) the limit set forth in this sentence shall be multiplied by two in the year in which a Director commences service on the Board and (ii) the limit set forth in this sentence shall not apply to Awards made pursuant an election to receive the Award in lieu of all or a portion of fees received for service on the Board or any committee thereunder.2015.Mar.27  Timken Company -- proxy statement's proposed LTIP provision:

No Nonemployee Director will be granted, in any period of one calendar year,  awards in excess of 6,000 Restricted Shares, 7,500 Common Shares, 7,500 Restricted Stock Units and 9,000 Option Rights.

2015.Mar.27  Eaton -- proxy statement's proposed 2015 Stock Plan:

6. Non-employee Director Awards

The Governance Committee may grant restricted shares, restricted share units or other share-based awards to non-employee directors of the Company at such times and subject to such terms and conditions as may be set forth in an Award Agreement as approved by the Governance Committee. Notwithstanding the foregoing, in no event will the grant date fair value (as determined for financial accounting purposes) of the awards granted to any one director in any one calendar year exceed the value of two-times the annual cash retainer in effect on the date of grant. Restricted shares are actual shares issued to the non-employee directors which are subject to the terms and conditions set forth in the Award Agreement as approved by the Governance Committee. Restricted share units are rights to receive shares (or cash equal to the fair market value of the underlying shares) at the end of a specified restricted period, subject to the terms and conditions set forth in the Award Agreement as approved by the Governance Committee. Notwithstanding anything to the contrary herein, no non-employee director shall receive any award under the Plan for a particular year if that director receives such a grant under any other stock plan of the Company.

2015.Mar.12   Cabot Corp - proxy statement's proposed 2015 Directors' Stock Compensation Plan (proposal 3):

The maximum grant date fair market value of common stock that may be granted under the Directors’ Plan in any calendar year during any part of which any non-employee director is eligible to receive an award is $400,000. The limit for a non-employee chairman of the board or a lead director is $500,000. In each case these limits are determined based on the fair market value of a share of common stock on the date the shares are issued under the Directors’ Plan.

2013.May.21  Shareholder Approval of Director Compensation.  Digirad's 2013 proxy statement sought shareholder approval for its director compensation, with a 61% approval vote being the result (just below its say-on-pay approval level, per 8-K).