Compensating co-op directors: USDA study reveals wide range of pay plans.
Service on the board of directors of cooperatives involves a significant commitment of time and mental energy. Some members who would make excellent directors may not seek election to the board because of these demands. Financial recompense may offset the reluctance of some members to serve as directors.
Cooperatives of a similar type, business volume and geographic location tend to adopt similar policies as to method and amount of compensation for directors. A recent survey identifies differences in the amounts and terms under which director compensation is paid. The survey identified three general types of financial compensation: (1) permeeting payment or per diem, (2) annual stipend or retainer, and (3) reimbursement of travel expenses. There were 419 responses to financial compensation questions. Farm supply (205) and grain (173) cooperatives were the predominant types of cooperatives that shared compensation information. Several large, high-value marketing cooperatives also shared tiffs information.
Only two of the surveyed cooperatives indicated that no compensation is paid to directors. Travel expense is often negligible for directors of local cooperatives. Reimbursement is available in 247 out of 419 survey cooperatives. Twenty-five cooperatives cover travel expenses but do not pay any additional compensation. Survey results for per-meeting and stipend compensation, but not travel reimbursement policies, are summarized below.
Compensation amounts are influenced by a cooperative's volume of sales. Responses are in three sales volume intervals: $2 million to $26 million; $27 million to $89 million; $90 million to $8 billion and for all respondents. The mode (the most frequently occurring number), median and range of compensation amounts, as well as the number of cooperatives in each sales-volume interval are summarized. The 27 cooperatives without per-meeting or stipend compensation are excluded from the calculations of the summary statistics.
Policies for directors and members arc established with an eye toward fairness and comparability with general practices of other cooperatives. For this reason, the mode--which measures the most frequent or common value--is an especially relevant summary statistic. Furthermore, the "mode count," or number of observations represented by the mode, shows the relative predominance of certain compensation amounts. There are a few cases of ties for the mode (bimodal values), and several commonly used compensation values are almost as frequent as the mode. In fact, compensation data are multi-modal in the sense that there are different strings of identical per-meeting rates or stipend amounts which cooperatives adopt. This multi-modal distribution of compensation is displayed in stem-and-leaf plots in an on-line report at the NCR-194 Web site (http://www.agecon.ksu.edu/accc/ncr194/).
A per-meeting payment applies for each day of a meeting's duration. Most co-ops reported that their board meetings usually do not extend beyond one day. Many cooperatives have variations in the payment amount for half day or for evening meetings. A few cooperatives mentioned that this payment was only for meetings attended and was therefore not automatic. Cooperatives often have monthly board meetings, but several have more than twelve meetings per year, and for many co-ops the number of meetings varies from year-to-year. Therefore, annual compensation is variable for cooperatives with a per-meeting payment policy.
The mode per-meeting rate is $100 in the three sales groups. There is a tie at $200 for the mode in the larges sales class (Table 1). A double asterisk (**) indicates bimodal values, reported in a footnote to the table. Also note that these per-meeting rate summaries do not include higher amounts that are often paid to officers of the board.
The median is $75, as compared to the mode of $100, which suggests that per-meeting rates less than the mode are also popular. In fact, 45 cooperatives paid $50 and 42 paid $75 per-meeting, as compared to 63 paying $100. Per-meeting compensation is generally higher for directors of the 42 cooperatives in the sales range $90 million to $8 billion, as indicated by its median of $150.
The term "stipend" describes fixed annual payments as a method of compensation. Although stipends are often paid-out monthly, the amount does not change when greater or fewer meetings are held in any given year. This method recognizes the fact that board meetings are not the only occasions for a director's work.
Director compensation with a stipend or fixed annual payment is less frequent than per- meeting payments, with only 69 cooperatives reporting this method for non-officers of the board (Table 2). Several cooperatives pay these annual stipends to their directors monthly and others make a single payment. A stipend recognizes service beyond board meetings, such as a director's role in helping to maintain a cooperative's positive relations with members and the public.
The stipend mode value is $1,200, which is paid by 17 of the responding cooperatives. The median stipend is $900. Stipends of less than $1,000 are paid to directors by 37 out of the 69 cooperatives having a fixed annual compensation. Note that a $1,200 stipend is equivalent to the annual compensation of cooperatives with a per-meeting rate of $100 and monthly board meetings. However, several cooperatives with a per-meeting method only pay for meetings attended, whereas those cooperatives with an annual stipend, even if disbursed on a monthly basis, pay their directors regardless of meeting attendance.
Compensation for board officers
Compensation is often higher for officers of the board. Furthermore, eight cooperatives provide compensation only to board officers. The 300 cooperatives with a per-meeting payment include 52 that also pay stipends to board officers. For the 248 cooperatives that exclusively compensate with a per-meeting payment, 79 have a higher per-meeting rate for the board chair than for other directors. The median for the board chair is $100, which compares to $75 per-meeting paid to non-officers of the board (Table 1).
Eighty responding cooperatives pay stipends to board chairs, which include 11 cases where they are not paid to non-officer directors. In another 36 cases, chair stipends are higher than the amounts paid to non-officer directors. The median stipend for the board chair is $1,000, compared to $900 for non-officer directors.
Board secretaries are paid higher per-meeting rates than non-officer directors in 52 cases, with a median of $95 as compared to $75. In addition, board secretaries receive per-meeting payments in 10 cases when either no such payments are made, or stipends are paid, to non-officer directors. In fact, eight of those 10 have a per-meeting payment exclusively for the board secretary.
Stipends for board secretaries are higher than for non-officer directors in 28 cases. In addition, there are eight cases where stipends are paid to board secretaries but not to non-officer directors. The median secretary stipend is $930, compared to $900 for non-officer directors.
Combined compensation policy
Combined or mixed compensation, i.e., paying both a per-meeting amount and a stipend, was reported by only 15 cooperatives for all members of the board, while 88 cooperatives apply this policy exclusively to officers. These variations for officers primarily apply to the board chair and secretary. Results for cooperatives with a mixed compensation policy are summarized in a more detailed report, available on the NCR-194 web page.
A combined compensation policy is more exacting than necessary for many cooperatives. Nevertheless, an examination of the 88 cooperatives with a combined policy for officers reveals the different economic purposes of per-meeting payments vs. stipends that are less evident when a single method of compensation is used.
When cooperatives provide higher compensation for officers, the chair is usually the highest compensated position on the board. Yet, cooperatives with a combined policy more often use a stipend to pay higher compensation to the board chair than a higher per-meeting payment. In contrast, a higher per-meeting rate is more frequently used to increase the compensation for board secretaries. This difference may reflect the fact that the added burden of secretary work involves board meetings, whereas the chair not only has more work in running the meetings, but may also be involved in a lot of member relations and public affairs work. These kinds of services are often difficult to track in terms of time spent, so are more accurately compensated with a stipend than a per-meeting rate.
Compensating non-member directors
Farmer cooperatives usually have members exclusively as their directors, as indicated by the survey results showing only 18 out of 437 with non-members on the board. Three of these 18 cooperatives were incorporated in Virginia, where state statutes require farmer cooperatives--under certain conditions--to appoint a public director. As discussed in the second article of this series, several cooperatives were considering revisions in their bylaws to allow appointment, if not election, of a non-member to the board. If cooperatives increasingly decide to place non-members on their boards, especially if such non-members are professionals or business leaders, the issue of paying higher compensation will arise more often.
Only two of the responding cooperatives with non-members on their boards reported compensation above what is paid to member directors. These cooperatives compete in high-value commodity industries and their non-member directors are selected for the purpose of providing business expertise that would unlikely be available from a board that included only members. Each cooperative faces its own set of challenges, and director selection and compensation policies must take such individual circumstances into account.
Although it is not unusual for many privately owned and publicly traded companies to have the flexibility to compensate directors differently, especially high-profile public figures, cooperatives operate with more constraining business objectives. In cooperatives, the emphasis on fair and equitable treatment gives some salience to the idea of compensating member and non-member board members the same.
Policies for selecting, electing and financially compensating cooperative directors are the topics of this three-part series of articles. These topics all relate to the goal in cooperative governance of getting the best directors possible to serve on the board.
The payments to directors--whether per-meeting, stipends or a combination--are intended to be a financial compensation for the extra time and effort they give to their cooperatives. In many non-cooperative businesses, directors often seem to receive excessive compensation, as frequently reported in the news media. For cooperatives, the challenge is far more to ensure that director payments are adequate, rather than one of keeping compensation in-check.
Some survey respondents commented that even though they have policies for director candidate selection and encourage competition for board elections, a large proportion of members are unwilling to consider serving on the board. Such member reluctance raises a question about the adequacy of director compensation.
The challenges of electing the best directors possible involve diligence in reviewing and updating governance policies, attending conferences to discuss best practices and participating in surveys that provide an opportunity for the cooperative community to share information.
Table 1: Per-meeting compensation for directors, reported for cooperatives in sales ranges and in total, 2003 Sales range * Co-ops Mode Mode count Median Range ($ million) (No.) ($) (No.) ($) ($) 2-26 145 100 31 75 4-400 27-89 113 100 26 80 20-300 90-8,000 42 ** ** 150 10-700 Total 300 100 63 75 4-700 * Total sales in 2001 as reported by cooperatives in the RBS annual survey. ** A two-way tie for the mode between $100 and $200 with each having 6 responses. Table 2: Annual stipend for directors, reported for cooperatives in sales ranges and in total, 2003 Sales range * Co-ops Mode Mode count Median Range ($ million) (No.) ($) (No.) ($) ($) 2-26 40 1,200 7 735 150-6,006 27-89 20 1,200 8 1,200 360-5,300 90-1,880 9 ** ** 1,200 480-25,000 Total 69 1,200 17 900 150-25,000 * Total sales in 2001 as reported by cooperatives in the RBS annual survey. ** A two-way tie of 2 responses for $600 and for $1,200.
Bruce J. Reynolds, Economist
USDA Rural Development