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Compensating Board Members

Background

A startup international oilfield services company wanted to compensate the members of its board of directors for the valuable time and service they were giving to the company. Although the company had never compensated these individuals, they were being asked to attend increasing numbers of meetings as they helped the company navigate a time of transition. The company also wanted to ensure that going forward it could attract industry leaders to its board with compensation that was competitive in the marketplace.

The company sought a plan for compensating board members that was competitive, simple but fair, adequate, and would accurately reflect the significant amount of time they were spending in service to the company.

Because the company had international directors—one in Norway and a second in Argentina—certain types of awards were problematic with negative tax consequences particularly for directors outside the U.S.

The company’s goals:

  • Determine the simplest and fairest way to compensate board members for their time and service to the company
  • Begin compensating members of the board of directors

Approach

Frost HR Consulting was contracted to complete a market assessment of board of directors compensation across peer group companies and make a recommendation for compensating the company’s board of directors.

Frost HR Consulting’s primary goals:

  • Determine what the normal board of directors compensation is for a company of this size and in this industry
  • Make a recommendation to the compensation committee of the client board of directors

The project followed a step-by-step process:

  • Consultants and the company agreed on a peer group of companies for assessment. In this case, a peer group had been identified for an earlier project studying executive compensation. The company and consultants agreed to use the same peer group for the board of directors compensation study.
  • Consultants researched board of directors compensation data from peer companies’ proxy statements.
  • Consultants normalized all peer group data for the client, determining what is normal for a company of the client’s size and industry to pay board members for an annual retainer, board meeting fees, committee chair fees (audit, compensation, nominating and/or governance), and lead director and chairman of the board fees. In this case, consultants’ assessment focused on where the company wanted to be compared to the market and what was most appropriate given the current situation of frequent meetings.
  • Consultants recommended board compensation that included annual equity and an annual retainer that would cover all board meetings, no matter how many occur each year.

Results

The client implemented the recommendation made by Frost HR Consulting. Although the new compensation plan was not as robust as those offered by more mature companies, the client acknowledged it was a solid first step that showed potential directors it had made progress toward appropriate compensation.

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