At various national and regional events and conferences, the issue of director compensation is always a hot topic. While the subject might be dollars, the bottom line is it takes a lot of sense for a board to design a solid policy. What works for one co-op may not be relevant for another.
Consider this: Did you know that in 2014 the average total annual compensation paid to a co-op director was $14,600? Fifty one percent of co-op directors received $12,000 or more. Five percent received less than $3,000, however.
This wide variation, based on the 2015-16
survey of more than 3,500 directors, shows the complexity surrounding the question of what electric cooperative directors are paid. But the question of how to arrive at that compensation is a universal one that all cooperatives have to answer.
At most electric cooperatives, boards may authorize the payment of a fee to directors for engaging in official cooperative business. This typically includes attendance at board meetings, committee meetings, related organizational meetings such as the statewide association or NRECA, and participation in sanctioned educational programs.
About 75 percent of reporting co-ops compensate directors with a per-meeting fee only, according to the survey. This can range from $3 to $2,000, with the average being $341. An additional 22 percent have a monthly retainer in addition to the per-meeting fee. The average monthly retainer is $783 but the range is from a minimum of $20 per month to $2,500.
Most boards also authorize reimbursement of expenses associated with these activities, such as mileage for driving to meetings, and hotel and meal expenses for attending related-organization meetings and educational programs.
Factor in that some boards still provide directors with insurance benefits, it’s easy to see how complicated the whole issue can become.
Plus, in this era of close scrutiny of all boards (cooperative, corporate, and non-profit alike) and the fact that compensation must be reported on Internal Revenue Service Form 990, director compensation is a crucial cooperative governance issue. It merits open, honest, objective and informed discussion to arrive at effective — and defensible, if necessary — decision making.
Terms Used to Describe Director Compensation
Some boards use the phrase “per diem” or “fixed fee” to refer to director compensation.
Typically, “per diem” is used to refer not to the fee paid to the director for performing his/her duties, but to a flat amount to cover travel expenses (e.g., meals, travel, hotels) while on co-op business, paid “in lieu of detailed accounting.”
Whatever terminology a co-op uses, consistency is important. In NRECA director courses, we refer to a “director’s fee” as the compensation paid for performing official duties such as attending board meetings.
Directors also may receive actual travel expenses upon submitting a detailed expense report.
It’s a good idea for boards to take the time on a regular basis to consider their approach to director compensation. Such a discussion could be framed around a set of key questions, which may include:
- What fee amount is to be paid to directors, and how is it determined? What are the components that make up the total compensation package?
- Is the fee perceived by co-op members, local elected officials, local newspaper editors) to be in line with director fees at like organizations (e.g., hospital boards, church boards, agriculture boards) in the community, in the state as well as out of state (e.g., other similarly sized electric cooperatives)?
- On what basis are director expenses reimbursed (e.g., Are receipts required for all expenses? Are spouses’ expenses covered, and if yes, why? What is considered reimbursable versus what is not?).
- How does a board manage directors’ attendance and participation in training programs, conferences, meetings or other, similar activities?
- Is the compensation a director receives the same for attending board meetings as for attending educational programs?
- Should the board chair or other officers receive greater compensation?
- Is the compensation amount and structure sufficient to attract the type of candidates that the board wants for positions that are or will become open?
- Beyond legal disclosure requirements, how transparent does the board want to be in disclosing information about director compensation to the membership?
It’s About Quality Work
My NRECA colleague Monica Schmidt, Vice President of the
National Consulting Group, advised that when boards consider director compensation it is important that directors understand that they are being paid for
quality work. Best practices ensuring high-level director performance include written guidelines that reflect the actual work expected for a board member and officers, including accurate tracking of actual hours a director spends performing the work, she explained.
Click here to see a chart depicting how many hours a week directors report spending on co-op duties.
“Directors need to have a clear understanding what each of these areas means and what your responsibilities are. That is what you as a director are being paid to do,” Monica said. The result is a compensation plan that reinforces highly effective performance of not just the board, but each individual on it, she said.
Designing effective and objective director compensation should be regarded as a strategic act of the board, that the policy is aligned with the long‐term interests of the cooperative and its members, she added. “A well-thought out compensation plan can be a component in attracting a community’s most qualified candidates and retaining their expertise.”
Conflict of Interest?
It’s important to remember that the determination of board compensation is inherently a conflict of interest because a board is determining its own compensation. Because of this, it’s a best-practice for a board to capture in policy the
process and the philosophy behind determining board compensation.
The National Association of Corporate Directors (NACD) promotes specific best practices for determining board compensation, which are outlined in an article written by Monica. You can find it by
How Much Should Directors Be Paid?
That’s up to your board. Again, the
process for setting the director fee is most important. Should a board’s compensation come under legal or regulatory scrutiny, it is the process that will be judged. Following are some areas a board may consider for determining fees and a reimbursement process:
- Many statewide associations have aggregate compensation data available. NRECA also conducts a bi-annual
National Directors Survey that includes aggregate financial and other total compensation information for board directors.Your co-op’s CEO may receive a free copy of this data by participating in the survey. For those cooperatives that don’t participate, the data is available for $495. For more details,
a peer group of “like cooperatives” for comparison which are similarly-sized within your state and in nearby states.
- Identify a
relevant compensation range (either within all co-ops in your state or within your peer group), and then decide where within that range your co-op wants to set its compensation.
- How should expense reports be handled? In many cooperatives the treasurer, the secretary, or a committee of the board plays this role. It is strongly urged that board not expect the CEO to be accountable for reviewing expense reports because it can put the executive in a potentially unpleasant conflict of interest situation.
Compensation will always be a hot topic ripe for discussion. That’s why cold logic and a cool, calculated approach to all of its aspects is the true bottom line.
Questions? Email Pat Mangan or
MORE RESOURCES FROM COOPERATIVE.COM(note this material is not in the public area of the website but was offered in various events and conferences. Please treat the material in a confidential manner.)
- Presentation at the 2016 Directors Conference offers charts and other resources that depict trends in compensation over several years. (The discussion notes in this presentation are particularly informative.) CLICK HERE. A similar document is available from the 2015 Directors Conference.