Are You Paid Enough?
from Autumn 1999
by Susan Caminiti
It wasn’t that many years ago that board service was rewarded by annual retainers and fees amounting to maybe $50,000, max, at the most generous companies. Add to that free first-class travel if the company was an airline, or a new car if it was an automaker. Today, however, directors at some public companies are pulling down six-figure compensation packages. Last year, 18 corporations paid directors more than a quarter of a million dollars, while just two shelled out that much in 1995. At Cisco Systems, the top-paying board, directors took home fully $684,123 in cash, stock, and options in fiscal 1998.
Make that mostly options. Cisco’s directors received 95.3% of their comp in stock option grants.
Cisco is just one of many companies that have embraced the trend toward performance-linked pay for directors. When pressure to pay boards in stock and options began mounting about five years ago, directors fretted that such plans would result in a de facto pay cut. Ironically, however, a booming stock market has enriched director comp. Indeed, some directors at high-flying technology companies are pulling down compensation packages that rival what they make on their day jobs.
While it’s probably the biggest factor, the record-setting stock market isn’t the only reason director pay is up. The laws of supply and demand are also at work here. Boards are under pressure to add outside directors who, in turn, are being asked to put in more time at those directorships. As a result, the pool of available, qualified talent is shrinking. “Almost everyone wants a sitting CEO to fill an open board seat,” says Thomas McLane of The Directorship Group, a search firm. “But more CEOs are limiting how many boards they will serve on. It’s not uncommon to hear them say, when asked, ’I just can’t do this right now.’”
William M. Mercer Inc., the New York consulting firm, recently completed its annual survey of board compensation and benefits and made the results available exclusively to Corporate Board Member. Based on the proxy statements of 350 major industrial and service companies, the study showed that the median annual director’s compensation package, not including stock options, rose to $64,000 last year, up 8% from the year before.
But directors’ pay packets are not swelling with cash. At 241 companies, or 69%, directors received part or all of their annual retainer in the form of restricted, unrestricted, or deferred stock—and it’s the equity portion of director compensation that is rising. Indeed, the median cash retainer was virtually flat at $25,047, while the median stock retainer rose to a value of $26,117 from $21,750 in 1997. Directors at 14 companies—4% of the Mercer survey—received all of their retainer in the form of stock, up from 3.4% of the companies in 1997.
Of the companies surveyed, 284, or 81%, paid directors for attending a regular board meeting, and 275 companies, or 79%, paid a fee for attendance at a committee meeting. These, too, remained unchanged: The median fee for a regular board meeting is $1,200, and the median fee for a committee meeting, $1,000. (For more on directors’ retainers and fees, see the table at right.)
But stock and stock options are boosting some directors’ pay into the stratosphere. In 1996, equity of one form or another accounted for 36.4% of directors’ pay; last year, it stood at 49.9%. In 1998, moreover, 60% of the companies surveyed by Mercer awarded options to directors, compared with 52% in 1996. And the median value of option grants increased from $29,030 to $45,973 during that period.
With the ongoing bull market, few directors are complaining about more of their comp taking the form of stock and options. Heck, the directors of all those newly minted, about-to-be-IPO’d, .com companies most certainly prefer it. Says McLane of The Directorship Group: “They’re all hoping they’re part of a company that’s going to make them zillionaires.”
Of course, it would be a foolish zillionaire who counted his options before they hatched. Directors paid in equity, particularly restricted shares and options, can lose it all if their volatile Internet stock tanks or the market in general cools.
What’s more, board members who are not enjoying huge equity windfalls may feel increasingly underpaid—at least on an hourly basis. Directors nowadays are expected to know more and do more. They are supposed to understand intimately the businesses on whose boards they serve, their competitors, and the global environment in which they operate. If that sounds time-consuming—well, it is. “When a company is looking for a new CEO, every director is going to want a chance to interview him or her, and then there are going to be a lot of conference calls between the various committees to discuss,” says Peter T. Chingos, head of Mercer’s executive compensation consulting practice. “That’s all done on the director’s own time and isn’t part of scheduled meetings.” Adds Julie Hembrock Daum, co-managing director of Spencer Stuart’s U.S. board services practice: “If they are doing their job right, and that is a big ’if,’ then they have a tremendous amount of responsibility and are not overpaid. Institutional investors and the media have really turned up the heat, and even though the definition of director hasn’t changed, I think the job is harder.”
Meanwhile, the benefits and perks that once came with a directorship are gradually fading. “There is a growing emphasis on equity and cash for directors and less on things that have nothing to do with performance, like pensions, charitable bequests, and the like,” Chingos notes. The percentage of companies offering such goodies dropped to 83% in 1998, down from 88% in 1994. (For more on director benefits, see the table on page 37.)
No director benefit has come under greater attack than retirement plans. In 1996, the Investors’ Rights Association of America called for an end to outside director pensions. “Giving a director a pension puts him in the same class as a paid employee of the company, which is not the proper role of a director,” explains John Wilcox, chairman of Georgeson & Co., a New York City proxy solicitation firm. In 1998, only 15% of the companies surveyed had director pensions, compared with 19% in 1997, and 64% in 1994.
Some companies still bestow the cars, air travel, and other valuable freebies to board members, but that practice is also falling out of favor. Directors at General Motors get a new car every three months just for filling out a product evaluation form. Ford allows directors to pick two new cars every year. The major airlines, like American, United, and Delta award first-class seats to directors and their families, and Marriott directors get complimentary hotel rooms almost anywhere in the world. “Perks are definitely a plus, and sure, it’s probably more exciting to sit on the board of an airline than a valve company,” says Daum of Spencer Stuart. “But they are not the deciding factor for directors, and I think most companies have cut back on perks because of how they are perceived by shareholders.”
Indeed, the trend toward linking director comp to shareholders’ interests continues unabated. Some cutting-edge companies like MicroAge and Whirlpool are indexing grants, whether cash, shares, or options, to a company’s performance. For example, a director might be granted 4,000 options only if the company’s earnings per share increases by at least 10% over the previous year.
In addition, more and more directors are being required to hang onto their stock. Of the companies Mercer surveyed, 18.6% expected their directors to hold a minimum number of shares that they have either acquired through awards or purchased outright. “That might not sound like a high percentage,” says Chingos, “but you have to remember, as recently as three or four years ago, hardly any companies did this.” For example, Becton Dickinson requires that directors own stock equal to five times their annual retainer ($225,000 worth) and gives them five years to amass it. Compaq Computer says directors must own 10,000 shares of the company (equal to around $220,000) and allows only three years to get to that level.
Money, however, is not the motivator for most directors. “With the exception of perhaps some academics or folks from the nonprofit world, most directors are already getting paid a pretty handsome sum back at their own job and do not need the money,” says Chingos. The real driving force, aside from the chance to network with other powerful people, is the shared knowledge that serving as a director brings. “You might come up with a solution to a problem that perhaps your own company never thought of,” says McLane of The Directorship Group. Then, too, there is the opportunity to contribute to the success of another organization. “So, often the psychic income outweighs the financial income,” Chingos observes.
