Directors' fees: Overview, definition, and example
What are directors' fees?
Directors' fees are the payments made to members of a company's board of directors in compensation for their time, expertise, and responsibilities in overseeing the company's management and strategic direction. These fees are typically structured as fixed amounts paid regularly, such as annually or quarterly, and may also include additional compensation for specific roles or tasks, such as chairing a committee or attending a significant number of meetings. Directors' fees are separate from employee salaries and are intended to compensate directors for their governance and fiduciary duties rather than for their operational roles within the company.
For example, a director of a publicly traded company may receive an annual fee for sitting on the board, with additional fees for attending special meetings or serving on subcommittees.
Why are directors' fees important?
Directors' fees are important because they help attract qualified individuals to serve on a company’s board of directors, ensuring the business benefits from experienced oversight and guidance. These fees also help recognize the responsibilities and liabilities directors face in managing a company’s governance. The structure of directors' fees can influence the composition of the board, encouraging a diverse range of expertise and experience. Additionally, directors' fees help ensure that board members are adequately compensated for their time and the risks associated with serving on a company's board, especially if the company is in a highly regulated or complex industry.
Understanding directors' fees through an example
Let’s say a large corporation has a board of directors consisting of several independent members who oversee the company’s financial performance, business strategy, and executive management. Each director is paid an annual fee of $50,000 for serving on the board. Additionally, the chairperson of the audit committee receives an extra $10,000 per year for their additional responsibilities. These fees compensate the directors for their governance duties, separate from any salary they may receive as employees of the company.
In another example, a non-profit organization with a smaller budget might pay its board members a nominal fee for their time and attendance at meetings. For instance, each director could receive $1,000 per year, which may be adjusted for the number of meetings or specific responsibilities.
An example of a directors' fees clause
Here’s how a directors' fees clause might appear in a corporate bylaws or director agreement:
“The Company shall pay each Director an annual fee of $[insert amount], payable in quarterly installments. Directors who serve as chairs of committees or attend additional meetings outside of the regular schedule may receive supplementary fees as determined by the Board of Directors. The Board shall review and set the Directors' fees annually, considering the company’s financial condition and industry standards.”
Conclusion
Directors' fees are a key component of corporate governance, compensating board members for their strategic oversight and decision-making responsibilities. These fees help ensure that companies can attract qualified directors, maintain strong governance, and comply with regulatory standards. By clearly defining directors' fees, businesses can align their compensation practices with industry norms and provide fair recognition for the vital role directors play in overseeing the company's affairs.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.