Director Compensation: A Review of Practices

This article is adapted from a previous Cooperative Grocer article by Karen Zimbelman and Margaret Goldstein. Resources include: "Study of Director Compensation" (Canadian Co-operative Association, 1988); "1988 Survey of Director Compensation" (Director's Monthly, November 1988); "Director Compensation: An Issue?" (Farmer Cooperatives, May 1989); "Survey of Director Compensation" (Rochdale Institute, 1986).

Director compensation: the concept and methods are commanding increasing attention among small and large cooperatives alike. Some co-op leaders and managers hold it up as a panacea for weak or ineffective boards of directors. On the other hand, in agricultural co-op circles, there are allegations of serious problems and abuses. What are the potential benefits and problems involved with director compensation? What are the experiences of other co-ops? other corporations?

Perhaps most importantly, does compensation make a co-op's directors better decisionmakers? Does it make board meetings more effective? Can director compensation really improve the quality of leadership and decisionmaking for co-ops?

The answer is yes.. .and the answer is no. Compensation for board members is absolutely no substitute for good leadership, strategic recruitment, or effective management of a board of directors. Nor is it a substitute for other public forms of recognition for director leadership and service. However, the effect of providing some compensation to directors can be an improvement in overall board performance because of the implied message to directors. Similarly, compensating directors sends a message to the larger community that improves the image of serving as a co-op director. Most of all, compensation can imply a set of expectations and overall climate that demands improved board performance.

Aren't directors "volunteers"?

Holding a voluntary position in a community organization -- co-op or otherwise -- can provide the civic-minded individual with a sense of pride, a valuable learning experience and a social outlet. Isn't this enough for the co-op director? Wouldn't paying directors destroy the voluntary nature of the co-op or violate the spirit of cooperation? Not necessarily. But will a director whose interests are genuinely aligned with the philosophy of co-ops appreciate monetary compensation in addition to other forms of recognition? You bet!

Compensation (beyond reimbursement for expenses) has been shown to have a significant positive effect on current and potential board members, on the co-op's membership and management, and on the community at large. Providing some type of stipend or compensation is much more of a symbolic act than an economic act. That payment tells directors, "You're a valuable asset to our business. You hold a key management position, and deserve compensation for the skills and experience you bring to our organization. This is an important job, and how you do it matters to the co-op."

Even more importantly, compensation makes it possible for the co-op to insist that, "We get what we pay for." Co-ops need dedicated and experienced directors and expect the same kind of excellent, professional handling of matters from directors as from management. Being willing to provide some compensation for that expertise says the board is not a casual or insignificant part of the co-op, and the co-op is committed to securing the best possible candidates from throughout its membership and its community -- not just those with lots of extra time on their hands. Skipping board meetings, not preparing, or wasting time will be more obviously unacceptable behaviors for directors who are receiving compensation for playing a key management role.

A director's sense of commitment and investment in the co-op can be heightened if his/her skills and time have been acknowledged through some sort of compensation. The climate in the board room can take on the professionalism needed to deal with the complex and difficult tasks of long-range planning, management evaluations, and monitoring organizational performance in a highly competitive industry.

Finally, co-ops which provide compensation find, naturally, that providing a monetary incentive makes recruiting board candidates a little less like pulling teeth. And, just as it assists in recruitment, boards that provide some compensation find that they seem to have fewer problems retaining good board members beyond one term. Compensation assures board members that their time and energy are valued. It also helps assure co-op members that their elected directors take seriously their vital role in the co-op.

The experience of larger co-ops and companies

Co-ops and other corporations alike arrived at the idea of providing compensation for directors for similar reasons. In agricultural co-ops, the practice began appearing as co-ops grew and became more complex. The time needed to be a board member of these larger, more complex coops grew along with the demands of the job. In public corporations, the litigious climate, increasing public pressure on boards for product liability, and hostile takeover climate resulted in fewer skilled and experienced people being willing to serve as directors. In both cases, compensation provided a way to reward directors for the demands of their jobs and the responsibilities they were taking on.

However, all have found that abuses can result from compensation that is provided for meeting attendance. When directors become "professional meeting goers" and the compensation is a director's primary motivation to attend meetings or run for re-election, the compensation ends up being a financial drain on the resources of the co-op, with no payback. Although providing compensation to directors "for each day of meeting attended" is more common among U.S. and Canadian co-ops than quarterly or yearly stipends, the trend is away from this method.

It also should be noted that virtually all U.S. and Canadian co-ops and corporations reimburse directors for expenses incurred as such. All companies have found that restricting their potential board candidates to those who can afford to absorb the incidental required expenses (e.g., travel, lodging, telephone, child care) is not a good practice. In other words, it shouldn't cost a member to be a director.

A recent study by Arthur Young and the National Association of Corporate Directors found that virtually all public corporations and 81 percent of all private companies provide some kind of compensation to their directors. In the case of public (stock) companies, the average yearly compensation was $16,000 to $21,000, while in private (family-owned) companies, the average was closer to $10,000. Of the 21 Canadian co-ops, all pretty large, that participated in a recent survey by the Canadian Co-operative Association, 14 provide a yearly "honorarium" that ranges from $1,800 to $8,000. Additional compensation, such as a retirement plan, life or even medical insurance, is provided by several of the public and private companies but is largely unheard of among co-ops.

How much and how?

Director compensation does not and should not in any way provide economic rewards equal to those of the job market. No one should make a living being a co-op board member, and board members should not feel that they can collect enough to substitute for another means of support. Similarly, we can learn from the experience of agricultural co-ops that compensation should not be provided for meeting attendance. The job of a director expands much beyond the actual board meeting, and compensation should be matched to the role being filled, not the hours. A director who is motivated to attend board meetings largely or entirely because s/he then collects a check is not the kind of director needed by a co-op. Co-ops needs boards to fulfill certain essential roles and tasks regardless of how long it will take to do so.

Board members, then, like the salaried professional, should receive compensation for their position in the co-op, not for time spent on cooperative business. A quarterly or, even better, yearly stipend provides a symbolic rather than economic reward to co-op directors, and carries the message that the director is being compensated for skills and dedication, not for time spent in meetings. In the same vein, the Board President or Chair, who should be carrying a greater share of the board's work than other directors, should be compensated more than other directors.

In sum, providing compensation to directors doesn't compromise the co-op's overriding commitment to service to the members. Directors who are genuinely committed to conducting the co-op's affairs with integrity and who sincerely understand the philosophical foundation of co-ops will recognize the benefit of rewarding leadership for their expertise. It will still be necessary to be wary of abuses, but there is no element of co-op philosophy that says that the only people who should be involved are those with time or who are willing to assume responsibility and liability without any compensation. The voluntary aspect of a co-op also doesn't mean that co-ops can't provide remuneration to people for their work and for taking on responsibilities for the whole organization. Compensating people for their positions is not antithetical to cooperative philosophy.