Directors Face Compensation Reality

Thanks to the multitude of new compensation disclosure requirements put into effect by the SEC last year, executive compensation rose to the top of the boardroom agenda. The regulatory intent was to give investors “a clearer and more complete picture of compensation of management.” The new rules, spelled out over 400 pages, require compensation data to be charted and described in a narrative fashion so that, in theory, each part of the pay package can be fully identified and quantified.

Against this backdrop, Steven Hall & Partners studied the proxy statements of the 100 largest publicly traded corporations for the fiscal year ending Dec. 31, 2006. What that research showed was that the median annual cash retainer being paid to directors increased year-over-year by 16 percent. That number parallels the increase in CEO pay, although board pay is not growing as rapidly, according to Pearl Meyer, now senior managing director of Steven Hall & Partners, the executive compensation consultancy she co-founded after leaving her eponymous firm. In its most recent review of CEO pay, Forbes reported that the chief executives of America’s 500 biggest companies got a collective 38 percent pay raise last year, altogether netting $7.5 billion. By Forbes’s estimate, that’s an average $15.2 million apiece. Exercised stock options accounted for the main component of pay, 48 percent. The average stock gain was $7.3 million.

Steven Hall’s study, to be published this fall, shows total remuneration, including cash, retainer, board meeting fees, committee compensation and equity, for non-chair board members up 4.2 percent to $213,8000, from an average of $205,150 a year earlier. Audit committee chairmen saw their total pay creep up almost 3 percent to $230,322 while total remuneration for compensation committee chairmen rose 6.8 percent from $213,966 to $228,500.

“In general,” says Meyer, “the average paycheck depending on your assignments is going to run from $213,000 to $230,000 all in.”

The large companies studied by Steven Hall & Partners showed a decline in the use of stock options at the board level. For years, Meyer notes, stock options were the preferred or primary long-term equity vehicle. The use of options is down from 41 percent to 30 percent this year and the use of full-value stock grants is up from 84 percent to 91 percent. “While some would attribute this shift to full value grants to the accounting charge to earnings for options, the trend has been spurred by corporate governance considerations, especially the desire to have board members own shares from day one and be totally aligned with the concerns of shareholders,” Meyer says.

While options fade, the earlier trend to eliminate board-meeting fees appears to be reversing itself as the number of meetings increases due to compliance requirements, transactions, and the complexity of corporate affairs today. Smaller companies are more likely to pay per-meeting fees. In addition, these new publicly traded or tech-oriented companies also tend to still be more options oriented because of the leverage they provide in recruiting board members and executives.

A vast distinction exists between the expectations of what is paid to corporate management and what is paid to board directors. The last major study of director compensation, made by the National Association of Corporate Directors and its Center for Board Leadership, was published in its 2006-2007 Compensation Report. What the study found is that after two years of growth (11 to 16 percent in 2006 and 14 to 36 percent in the 2005 study), board pay increases slowed across all companies whether small, medium, or large. In general, the NACD found that annual cash retainers continue to account for about one-quarter of total direct compensation. For the largest companies, those defined as being in the Fortune 200, full-value shares for the first time represented the largest single component of compensation.

While adjusting pay to the new regulatory realities seems to have played itself out, compensation could become a hot-button issue again as presidential candidates swing toward their respective nominating conventions and into the final stretch toward the election of 2008. “A fairly fierce political campaign is taking shape and [executive compensation] is a populist issue,” warns Pearl Meyer & Partners’ managing director Jannice Koors. “Under normal circumstances some of the attention that the regulatory bodies periodically give to compensation in the post-proxy analysis dies a normal annual death. But given the presidential campaign cycle, it may not die its natural death next year. I wouldn’t say there’s panic about that, but boards are watching developments with a much keener eye and a greater sense of responsibility.”
        
The Directorship Comp Survey
To take the pulse of current trends in executive compensation, Directorship conducted a 10-question e-mail survey of its readers identified by their service to public boards. Directorship sought to gauge readers’ experience with independent compensation counsel, preferred forms of compensation, and whether they favor  “say-on-pay” legislation, and the new rules governing compensation disclosure.