The Challenge of a Well-Paid Board

You get what you pay for, right? Conventional wisdom says that the more you pay for something – a car, a suit, a handbag – the higher the quality.

Can the same be said for the amount paid by a company to its board of directors? Does paying a higher director’s fee get a company more effort, better oversight, and solid governance?

The answer may be, “No.”

A recent study posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation web page (here) suggests that paying top-dollar to individuals to serve on your company’s board of directors may actually make the board less effective.

Why? According to the study, excessive compensation seems to lead directors to be more entrenched – they like making all that money for serving on the board – and, as a result, less willing to confront a low performing CEO or challenge a poorly executed business plan. Instead of closely monitoring company performance, highly paid directors seem to shy away from doing anything that might clash with the CEO and increase their risk of being replaced on the board.

In short, paying high compensation to attract board members can lead to:

  1. A loss of money for the company. This article states that the average excess compensation is greater than $60,000 per director - a price tag that can quickly add up for a company over time.
  2. Entrenchment of company management. The authors’ findings suggest that “the overpayment of board members provides the CEO with additional immunity and job security.”
  3. Reduced oversight. Overcompensated directors “are not necessarily focused on protecting shareholder interests.”

The bottom line: While it might seem like a good idea to offer high board compensation to attract and retain top talent, this practice could lead to significant problems and ultimately a lack of real oversight down the road.

In this situation, you may not get what you pay for.