There is an active and well-established market for private and public company directors. While a public company’s board director compensation is transparent, the same is not true for private companies. There are a number of sources for private company board compensation data, and the data tends to group into segments based on revenue ranges of the businesses involved.
In an attempt to help make sense of this fragmented market, I summarized the highlights of forming boards and compensating people for their board service in an article published in August 2017. That article is a basis for the role and duties of a board, but here, we will specifically dive deeper into director pay.
The market segments by company revenue size. Below is what I usually suggest as appropriate board compensation to owners forming a new board, based on company revenue size:
These figures exclude PE portfolio companies, which tend to pay much more, and VC businesses, which tend not to pay cash compensation to directors—most of which are typically insiders.
During my tenure as Chairman of Director Development and Training at the Private Directors Association, I saw postings for about 50 seats per year. To the extent compensation was listed in a posting, the data was generally consistent with these rules of thumb.
Recently, a new study of director compensation was published by Private Company Director Magazine, along with Compensation Advisory Partners and Family Business Magazine.
The initial study was published in 2019. The 2020 study included 982 respondents. About 60% of the respondents were under $100 million in revenue, and another 20% were greater than $250 million in revenue. The vast majority of the respondents were family businesses, with the balance being mainly privately controlled entities.
Based on the data, the median board retainer by revenue is consistent with my past observations, with the overall median coming in at $28,000 per year, down slightly from 2019. Contrary to prior observations, companies under $50 million revenue were paying cash compensation of $20,000 in annual compensation. That is one benefit of a larger dataset, and a statistically valid approach, as compared to general observation.
Cash compensation was a combination of annual retainers and meeting fees. The public company practice of paying only via retainers is starting to be embraced by private companies, as meeting fees continue to decrease as a percentage of total compensation.
My observations, presented above, were not scientific, but good approximations to help owners understand how and how much a board director is paid. The survey is statistically robust, and fortunately, corroborates my unscientific observations.
There are a number of other compensation studies available. Many are behind website paywalls. Here are some of the more well-known sources:
A number of search firms have their own, private databases that they use in recommending compensation to clients. These reports are for North American businesses. There are separate data sets for businesses located in Europe, such as Nurole.
So, while these thoughts summarize private company board compensation, they should be viewed as half of the equation. The other—and more important—half of this issue is board performance.
What are you getting for the compensation? To get the best results, the two need to be tied together. The board is a business expense made by the owners to enhance their investment, just as with all other business functions. It needs to be evaluated and be held accountable to get the best results. Regardless of what you pay, make sure you are getting full value for what you spend.
©All Rights Reserved. May, 2021. DailyDACTM, LLC d/b/a/ Financial PoiseTM
Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
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