Thanks to the multitude of new compensation disclosure requirementsput into effect by the SEC last year, executive compensation rose tothe top of the boardroom agenda. The regulatory intent was to giveinvestors “a clearer and more complete picture of compensation ofmanagement.” The new rules, spelled out over 400 pages, requirecompensation data to be charted and described in a narrative fashion sothat, in theory, each part of the pay package can be fully identifiedand quantified.
Against this backdrop, Steven Hall& Partners studied the proxy statements of the 100 largest publiclytraded corporations for the fiscal year ending Dec. 31, 2006. What thatresearch showed was that the median annual cash retainer being paid todirectors increased year-over-year by 16 percent. That number parallelsthe 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-foundedafter leaving her eponymous firm. In its most recent review of CEO pay,Forbes reported that the chief executives of America’s 500 biggestcompanies got a collective 38 percent pay raise last year, altogethernetting $7.5 billion. By Forbes’s estimate, that’s an average$15.2 million apiece. Exercised stock options accounted for the maincomponent of pay, 48 percent. The average stock gain was $7.3 million.
StevenHall’s study, to be published this fall, shows total remuneration,including cash, retainer, board meeting fees, committee compensationand equity, for non-chair board members up 4.2 percent to $213,8000,from an average of $205,150 a year earlier. Audit committee chairmensaw their total pay creep up almost 3 percent to $230,322 while totalremuneration for compensation committee chairmen rose 6.8 percent from$213,966 to $228,500.
“In general,” says Meyer, “theaverage paycheck depending on your assignments is going to run from$213,000 to $230,000 all in.”
The large companiesstudied by Steven Hall & Partners showed a decline in the use ofstock options at the board level. For years, Meyer notes, stock optionswere the preferred or primary long-term equity vehicle. The use ofoptions is down from 41 percent to 30 percent this year and the use offull-value stock grants is up from 84 percent to 91 percent. “Whilesome would attribute this shift to full value grants to the accountingcharge to earnings for options, the trend has been spurred by corporategovernance considerations, especially the desire to have board membersown shares from day one and be totally aligned with the concerns ofshareholders,” Meyer says.
While options fade, theearlier trend to eliminate board-meeting fees appears to be reversingitself as the number of meetings increases due to compliancerequirements, transactions, and the complexity of corporate affairstoday. Smaller companies are more likely to pay per-meeting fees. Inaddition, these new publicly traded or tech-oriented companies alsotend to still be more options oriented because of the leverage theyprovide in recruiting board members and executives.
Avast distinction exists between the expectations of what is paid tocorporate management and what is paid to board directors. The lastmajor study of director compensation, made by the National Associationof Corporate Directors and its Center for Board Leadership, waspublished in its 2006-2007 Compensation Report. What the study found isthat after two years of growth (11 to 16 percent in 2006 and 14 to 36percent in the 2005 study), board pay increases slowed across allcompanies whether small, medium, or large. In general, the NACD foundthat annual cash retainers continue to account for about one-quarter oftotal direct compensation. For the largest companies, those defined asbeing in the Fortune 200, full-value shares for the first time represented the largest single component of compensation.
Whileadjusting pay to the new regulatory realities seems to have playeditself out, compensation could become a hot-button issue again aspresidential candidates swing toward their respective nominatingconventions and into the final stretch toward the election of 2008. “Afairly fierce political campaign is taking shape and [executivecompensation] is a populist issue,” warns Pearl Meyer & Partners’managing director Jannice Koors. “Under normal circumstances some ofthe attention that the regulatory bodies periodically give tocompensation in the post-proxy analysis dies a normal annual death. Butgiven the presidential campaign cycle, it may not die its natural deathnext year. I wouldn’t say there’s panic about that, but boards arewatching developments with a much keener eye and a greater sense ofresponsibility.”
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. Directorshipsought to gauge readers’ experience with independent compensationcounsel, preferred forms of compensation, and whether they favor “say-on-pay” legislation, and the new rules governing compensationdisclosure.
Of some note, 75 percent of the readerswho responded to our survey reported that their boards used independentcompensation counsel, separate from the executive compensationcounseling received by the company. Ranked in order of importance, themost appropriate from of compensation for a director was an annual cashretainer (88 percent) followed by board meeting fees (56 percent),committee fees/retainers (56 percent), chair fees and retainers (44percent) and differentiated committee pay (22 percent). Some 38 percentof the respondents reported that board compensation had increaseddramatically in the last two years. The same percent also reported thattheir board pay stayed the same. More than three-quarters of allrespondents said that favor increasing pay to board directors,especially in the post-SOX environment and given the new liabilityrisks of board service.
Ayes outweighed nays whenrespondents were asked if they favored “say on pay” legislation nowpending in Congress that would give a nonbinding vote to shareholderson executive compensation, 67 percent versus 33 percent. Interestingly,no single respondent reported to be “not sure” on this issue. Whenasked if they were in favor of the new executive compensationdisclosures (CD&A) enacted during the last proxy season, there wasmore uncertainly but also more support. Some 22 percent said they were“not sure” versus 67 percent who said they favored CD&A and 11percent who registered opposition.