In recent years, director compensation decisions have been significantly scrutinized. Equity awards granted by directors to themselves under shareholder-approved plans, and in particular the standard of review that should apply when these awards are challenged, have been the subject of several Delaware Chancery Court cases (see, e.g., Seinfeld v. Slager, (Del. Ch. June 29, 2012) and Calma v. Templeton, (Del. Ch. Apr. 30, 2015)). In December 2017, the Delaware Supreme Court weighed in, holding that under certain circumstances the entire fairness standard of review should apply to discretionary decisions by directors to award themselves compensation under an equity incentive plan previously approved by shareholders (see In re Investors Bancorp Stockholder Litigation, (Del. Dec. 13, 2017)). Following the Delaware Supreme Court's decision, the parties reached a settlement in December 2018, which was approved by the Delaware Chancery Court in June 2019 (see Delaware Chancery Court Approves Settlement in In re Investors Bancorp Stockholder Litigation).

In July 2023, Tesla Inc., Elon Musk as CEO and director, and several non-employee directors entered into a stipulation of settlement filed with the Delaware Chancery Court to settle breach of fiduciary duty and unjust enrichment claims related to compensation Tesla paid to non-employee directors beginning in 2017. As part of the settlement, the directors agreed to return approximately $735 million in compensation and Tesla agreed to make corporate governance and other internal control changes (see Legal Update, Settlement in Excessive Director Compensation Suit Against Tesla Requires Corporate Governance Changes).

Against this backdrop, when designing a director compensation program, and setting up processes for making director compensation decisions, companies should not take these matters lightly.

Compensation programs for non-employee directors should be designed to:

This Toolkit contains continuously maintained resources designed to help companies design and draft compensation programs for their non-employee directors that: