The Relative Importance of Cash and Equity
The Entrepreneurial Boards Composition Survey unveiled broad differences in the remuneration structures of public and private technology firms. In particular, the study revealed private companies are much less likely to use cash-based remuneration, such as cash-based meeting fees or a cash retainer. In fact, private companies are much more likely to either not pay their directors, or rely exclusively on equity awards, such as annual awards or awards upon appointment.
Figure 12a: Director Remuneration: Cash/Equity for Private and Public Companies
Cash-Based Meeting Attendance Fees
Consistent with the “good governance” guidelines that groups like the Council of Institutional Investors have publicized, the Entrepreneurial Boards Composition Survey finds most small technology firms do not pay meeting attendance fees to board members, committee members, or committee chairs. Only 27% of companies that responded pay a board meeting fee. Among the respondents that pay board members to attend, the mean meeting attendance fee is US$1,600. The median cash compensation for meeting attendance is US$1,000. In fact, nearly 50% of the firms that pay for board attendance pay exactly US$1,000 per meeting. (See Figure 12b).
Figure 12b: Board Meeting Fees
Figure 12c: Distribution of Board Meeting Fees Among Firms that Pay Such Fees
60% of firms that pay board member meeting fees also pay additional fees to nonchair committee members. Among the respondents that pay such fees, 35% pay exactly US$500 extra per meeting, while 40% pay exactly US$1,000 extra per meeting. (See Figure 13.) And of the firms that pay augmented non-chair committee fees, 40% provide additional payment to committee chairmen. Among firms that make these awards, the median cash payment is US$1,000.
Figure 13: Distribution of Additional (non Chairman) Committee Fees for Firms that Pay such Fees
Annual Cash Retainer
According to the survey, there is a strong association between a company’s revenues and the dollar figure of the annual cash retainers it pays to board directors. (See Figure 14.) The corporation’s ownership structure, however, appears to be the most significant factor in the payouts. In order to determine whether the size of annual cash retainers varies across public and private firms, the survey drilled down into the revenue-matched subsample data of the companies described earlier.
Based on this sample, the survey revealed public firms are three times more likely to pay an annual cash retainer to board members. In other words, when the size of the companies remain constant, approximately three quarters of the public firms in the sizematched sample pay a retainer. By contrast, only one quarter of the private firms pay an annual cash retainer to board members.
Drilling down deeper, the survey offers financial data to fill in the big picture. Specifically, among the size-matched public firms that pay a cash retainer to board members, the median retainer is US$12,500. Among the size-matched private firms that pay a cash retainer to board members, the median retainer is US$20,000. The fact that the median retainer among private firms is larger than the median retainer among public firms may seem odd at first glance. However, this anomaly occurs because more public companies provide cash-retainers, and, therefore there are a greater number of small retainers.
Figure 14: Board Member Annual Cash Retainer
The Entrepreneurial Boards Composition Survey discovered significant differences in the structure of equity-based compensation across public and private firms. In 44% of private companies, board members receive equity awards only upon joining the board. By contrast, only 4% of public companies employ the same policy. Instead, individuals receive an annual equity award and equity upon joining the board at 71% of public firms. Only 18% of private companies follow such a policy. (See Figure 15a.)
Not surprisingly, the survey confirms public and private firms differ in the emphasis they place on stock options vis-à-vis full-value awards, such as restricted stock, deferred stock, and unrestricted shares. In particular, public companies rely much more heavily upon stock options than do private firms. This increased emphasis is present in both appointment awards and annual awards. (See Figure 15b.)
Figure 15a: Equity Award Structure and Vesting
Figure 15b: The Structure of Equity-Based Remuneration
The data for equity compensation shows the median percent of shares outstanding upon joining as well as an annual retainer for board members and for the board chair. Only 50% of companies give out stock options. This data is for companies providing stock options. In terms of board members, a typical option grant would be 0.3% of the shares outstanding upon joining and 0.1% per year. In terms of the median for the chair, a typical stock grant would be 0.5% upon joining and 0.1% per year. Figure 16 provides a more detailed breakdown of equity grants. The implied option price for private companies is the most current price available, often the price of the stock at the last round of financing. Many times, if there is an upcoming round of financing, then the option price could be a blended rate of the current and past rounds of financing. The number of total shares outstanding in a ‘cliff’ is typically consistent with the option price blended rate. It is interesting to note that the vesting schedule for option awards varies from 3 to 5 years, with a median of 4 years. These numbers are typical and very expected.
These numbers are surprising and we consider them to be on the high end of what we have experienced before. They are reflective of very senior board members. A prior random sample of equity stock option grants showed 0.19%. It is important to note however that if our statistics included companies that paid no equity, the numbers in Figure 16 would be lower.
Figure 16: Percent of Equity Compensation
Note: This is the median for companies offering equity as part of compensation. Roughly 50 percent of our sample offers equity as part of the board members' compensation package.