Director Pay Cuts
from
Summer 2001
by Joseph B. Treaster
With corporate earnings and stock prices as unreliable as a cheap
beach umbrella in a summer storm, you might think directors would be
sharing investors’ pain by taking a pay cut.
They have.
With much of their compensation in stock and stock options, most directors have already taken a big hit. Yahoo!, which in 1999 had the highest-paid board, is a perfect example. That year, each Yahoo! director received a total compensation of $3.1 million, all of it in stock. In 2000, mainly because the price of Yahoo! stock crashed, their annual comp fell to a measly (by their standards) $382,500. This year is shaping up a tad better, according to William M. Mercer Inc., a consulting firm that specializes in director compensation. In early June, Yahoo!’s shares were healthier. If that holds steady, it would mean annual comp of $437,850 per director.
Cash compensation is a different matter. Yahoo! does not pay a cash retainer, but most nontech companies do. And while that surely could be whittled down, experts in executive compensation and corporate governance say that now’s not the time to do it. Nell Minow, who runs thecorporatelibrary.com, a website for directors, says the main reason is that board members work hardest during tough times. “In the next 18 months we’re going to see more CEO dismissals, more business combinations and uncombinations, as companies buy and sell various assets,” Minow says. “All those things are tremendously demanding of a director’s time.”
Furthermore, the cash in directors’ pay packages is generally seen as their base pay, rather than as a reflection of performance. “If you could show me where cash was raised dramatically due to a company’s performance, then I would say it ought to be pulled back when the performance slows down,’’ says Charles Elson of the Center for Corporate Governance at the University of Delaware. “But extremely few, if any, compensation packages work that way.” Indeed, instead of pay cuts, directors may actually try to increase their cash compensation by upping their fees for heading committees and taking on special projects, says Judith Fischer, managing director of Executive Compensation Advisory Services in Alexandria, Virginia.
The shift during the last decade toward greater compensation in stock was designed to link the fortunes of directors with those of shareholders. For directors to bail out now “would send an awful signal,’’ says Elson. “If you don’t have enough faith in the company to want its stock, why should anyone else?”
