Compensation For Directors Is Out Of Line At A Lot Of Places
from
May/June 2006
by Laura J. Finn
Relax—that’s just a minority opinion, as we shall see. Nevertheless, it’s good to note that 79% of the directors surveyed by
Corporate Board Member
support the Securities and Exchange Commission’s push for more daylight
on executive pay. “I’m in favor of anything that promotes transparency
and bridges the gap between shareholders and managers,” says survey respondent Todd B. Martin, 39, a partner at Martin Capital Management,
an investment advisory firm in Elkhart, Indiana, and chairman of the
audit committee at St. Joseph Capital Corp., a bank holding company in
Mishawaka, Indiana. “Managers are hired by the shareholders using board
members as a conduit.”
Just as encouraging, 82%
say they’d like less fog around director compensation, another thing
the SEC is pressing for. “Greater transparency will force boards to act
as they should have acted all along,“ says Albert H. Cohen, 73, a
management consultant who’s on the board of Merrimac Industries Inc.,
an electronic-components manufacturer in West Caldwell, New Jersey.
Adds Edward C. Barrett, 57, the CFO and a director of Leesport
Financial Corp., a financial-services company in Wyomissing,
Pennsylvania: “The proposed SEC rules are reasonable, they create clarifications, and they are not a big
reporting burden. They’re less expensive than Sarbanes-Oxley.”
The survey results shown here are based on 80 responses to an e-mail
poll that included questions about the SEC’s proposals and other
matters. Among the latter was whether directors think companies should
disclose what they pay non-executives, including celebrities such as
NBC’s Katie Couric (estimated 2005 take: $14 million, not far shy of
the $15 million salary and bonuses paid to Jeffrey Immelt, chairman and
CEO of GE, the network’s parent). “Why not?” asks Samuel Robert
Dessalet, 74, chairman of Winland Electronics Inc. in Mankato,
Minnesota. “Any significant money should be disclosed.”
Perhaps the major surprise in the findings is that 87% of the
respondents say they understand how their CEO’s total comp is
calculated. “I ask questions. Part of the job of director is to ask
questions,” says Joseph L. Williams, 61, the CEO of Basic Supply Co., a
janitorial-products company in Huntington, West Virginia, and a
director of Abigail Adams National Bancorp in Washington, D.C. Williams
serves on the board of a bank, which may make him especially skilled
with numbers. But can that be true of everyone in the 87%? Are all of
you ready for a written test on how Black-Scholes option valuations
really work?
We’ve run a variety of surveys over the years—notably in our annual
“What Directors Think” special issues—and anecdotal evidence suggests
that they’re popular among readers. But just maybe we’ve given short
shrift to what those in the minority think—the 19% in this poll, for
example, who say shareholders should have a vote on how much directors
are paid. “I have no problem with shareholders’ speaking up; it’s their
capital that supports the business. If shareholders can vote board
members into and out of office, they should have the ability to opine
on director compensation,” says Todd Martin.
We tried to interview directors who represent the minority position on
all 10 of the survey questions, but weren’t always successful. For
instance, we couldn’t find anybody who was prepared to speak up in
favor of less transparency regarding executive or director comp. The
closest is Peter T. Kissinger, 61, chairman and CEO of Bioanalytical
Systems Inc., a drug-development outfit in West Lafayette, Indiana. He
worries about the “information overload” more transparency might bring.
“We could reach the point where we disclose everything—and nobody
notices it,” he says.
It was easier to find respondents representing minority viewpoints on
other issues. For example, among the 27% who think CEO pay does not
reflect market forces is John J. Healy, 70, director of operations at
the Massachusetts Manufacturing Extension Partnership, a nonprofit that
helps manufacturers in the commonwealth, and a director of Providence
& Worcester Railroad Co. “It’s the board’s responsibility to decide
adequate compensation,” he says. “It’s not a question of supply and
demand.”
Similarly, while 75% think the SEC’s push for more transparency in
executive comp will have little or no effect on recruiting CEOs, 25%
believe it will make the task tougher. Among them: John F. Osborne, 61,
president of Competitive Customer Support, a consulting firm, and board
member of Electroglas Inc. in San Jose, California. “I believe there is
a fine balance between stewardship and shareholders’ right to know,” he
says. “We just found a CEO. We looked at 35 candidates, and it took
many months. Transparency will discourage would-be CEOs.” Some 42% also think the disclosure of performance metrics, which is
part of the SEC’s proposal, would hurt their company’s ability to
compete. “Financial awards are okay to disclose, but nonfinancial strategic awards give competitors too much information,” says director Albert Cohen.
Should shareholders vote on how much executives and directors are paid?
The majority of respondents are against both, by big margins. But Gene
A. Strasheim, 65, a financial consultant and chairman of the audit
committee at Natural Gas Services Group in Midland, Texas, thinks CEO
pay at least should be put up for a vote. “Too many have loaded boards
with their cronies,” he says. “It lies at the feet of the board to take
a strong look at this issue. Far too many people are overpaid in
corporate America. Shareholders should vote on compensation, and maybe
it’d get turned around.”
Richard L. Pearlstone, 58, president of a Baltimore investment company, Pearlstone Group Inc., and a director of Sizeler Property Investors Inc. in Kenner, Louisiana, thinks shareholders should have a say in board-member pay too. “They should vote on our compensation because we represent them, and if they don’t like us they won’t want to pay us. Compensation for directors is out of line at a lot of places,” he says.
