Who Wants to Be a Millionaire?
from Winter 2000
by Joseph B. Treaster
To paraphrase Old Blue Eyes, 1999 was a very good year, at least for directors of major U.S. corporations: Median total compensation rose to $99,198, up from $92,125 in 1998. For directors at some Internet companies, the pay was very, very good. (Now all hum: Fly me to the moon….)
Dot-com companies topped the charts, with the six board members of Yahoo! taking first place with more than $3 million each, all in stock options. Directors of RealNetworks, an Internet multimedia provider, were next in line with over $2 million, also all in options, according to the annual survey of board compensation by William M. Mercer Inc., a New York City consulting firm. Six other dot-coms, including eBay, the online auction house, and CMGI, an Internet operating and development company, reached the platinum level, paying their directors in excess of $1 million.
Twenty-eight other companies paid their directors more than $250,000, ranging from $818,654 at Sun Microsystems to $253,570 at Schwab Corp. Meanwhile, at Cisco Systems, which boasted 1998’s best-paid board, the directors’ total comp dropped from $684,123 to $588,829, putting them in 16th place.
As we now realize, the sky-high 1999 stock prices of dot-com companies and other high-tech firms were as ephemeral as cherry blossoms, and come mid-April those blooms started falling to earth, or somewhere close to it. Since Yahoo! and the seven other companies at the top of the ’99 heap paid their boards exclusively in stock options, the waning months of 2000 found their directors crooning in a minor key. It is doubtful that any were truly singing the blues, however, since a number of directors at all the companies reported exercising stock options during the heady days of 1999.
The directors who did best in 1999 in terms of cash—those who were paid the old-fashioned way—were at old-line companies like Alcoa Inc., which paid its board members a flat $100,000. Others gave their board members a mix of cash and stock. Coca-Cola and Lucent Technologies paid their directors $50,000 in cash, but Coke sweetened its pot with an additional $19,000 cash payment for other services and $75,000 in stock, bringing the total to $144,000. Lucent paid directors who chaired committees an extra $10,000 and added other stock awards that brought the total to $268,796. Again, this figure deflated in 2000, thanks to Lucent’s steep slide in stock value.
As the Mercer research shows, rewarding directors with stock and stock options, a trend that began in the mid-’90s, continues apace in the boardroom, just as it has in the executive suite. By 1999, Mercer found, 94% of U.S. companies included stock and options in their directors’ pay packages, versus 92% in 1998. On average, stock accounted for 58% of directors’ total comp, versus 50% in 1998 and just 36% in 1996. Mercer’s findings are based on a study of 380 publicly traded corporations with revenues ranging from $20 million to more than $100 billion. The firm analyzed outside directors’ compensation and benefits from year-2000 proxy statements for 1999 data and then interpreted its findings exclusively for Corporate Board Member.
The trend in directors’ pay has been straight up and is accelerating fast—witness last year’s median of nearly $100,000 compared to the $59,150 directors took home five years ago. A study of 250 companies prepared by Executive Compensation Advisory Services in Alexandria, Virginia, which was also used in the preparation of this story, mirrored those findings.
Who are these well-paid folks? Mostly CEOs, active or retired, or perhaps chief operating officers of other companies, according to Peter D. Crist, vice chairman of Korn/Ferry International, the executive search firm. The dot-coms seek out similar types for their boards and often include company founders and venture capitalists. But, Crist says, such companies also like to include university professors. “The Stanford crowd is very well ensconced,” he says. “And there are a number of Harvard professors.”
Dot-com service offers a double attraction for board members: an opportunity to work alongside some of the smartest (and youngest) CEOs on the planet—and to make a killing on the stock. Many board members won a double header. And despite this year’s roiling markets, many of these directors are still sitting pretty, including those at Yahoo!. Even with the stock trading at a recent $52.75—down about 75% from its January high—the board members were still looking at an annual pay packet of some $1.5 million. Not bad for a bunch whose average age is 44.
CEO Tim Koogle sees the drop in share price as part of a cyclical swing from euphoria. “I think I have this gray hair for a reason,” he told the New York Post. “Sentiment is sort of rationalizing back, if you will, and settling, and then we will see it pick up again.”
Yahoo!, he reminds anyone who asks, has 3,500 customers, including 30 of the Fortune 50 and 60 of the top 100 advertising spenders worldwide, and it reaches 60% of the quarter-billion people on the Internet. Better yet, from an investor perspective, the company had better-than-expected third quarter results, earning $81.1 million on revenues of nearly $300 million, roughly double 1999’s numbers over the same period.
Koogle is also enthusiastic about signing Edward Kozel, 46, to the board. Kozel, former chief technology officer at Cisco Systems—he’s now on sabbatical—founded Cisco’s business development group, responsible for 22 acquisitions.
Cross-fertilization between the two companies will be something to watch: “Chief Yahoo!” Jerry Yang has now joined Kozel as one of Cisco’s outside directors.
Many observers argue that director compensation has reached absurd levels. Says Charles Elson, director of the Center for Corporate Governance at the University of Delaware: “A million dollars is a lot of money for a few meetings.” He believes that such compensation is, in fact, dangerous. “It can lead to a passive board,” he says. “Who would challenge the CEO and take a chance on being removed from that kind of income stream? It becomes a financial disincentive to challenge management, which, after all, is part of what a board is designed to do.”
Elson concedes, however, that the rising wave of shareholder lawsuits has put directors on notice that their work is being carefully monitored. “The threat of litigation always has some impact on behavior,” he says. So, too, does pressure from institutional investors, especially when they introduce alternate slates of directors, Elson says.
At the other end of the spectrum, a number of corporations manage to keep their directors’ pay relatively low. Warren Buffett’s Berkshire Hathaway, for example, paid its seven directors $14,400 each last year. Berkshire, along with some of the other low payers such as Smithfield Foods Inc., Family Dollar Stores Inc., and the Loews Corp., reward their board members only in cash.
Amazon.com and three other new economy companies go these low-end payers one better. They have been able to get people to serve on their boards without offering any pay at all—no cash, no options, no nothing. A spokesperson for one of them, the Internet services provider At Home Corp., explained this seeming parsimony with a simplicity that might warm shareholders’ hearts but send shivers down the collective spines of some boards: “Board members are already investors in the company. So they don’t need to get paid.”
Clearly, that’s not going to be a big rallying point—or an effective recruiting cry. Directors expect to be paid, and, says Peter Chingos, head of Mercer’s executive compensation consulting practice, more of them will want a portion of that compensation to be in stock. The risks of market turmoil? “These are long-term plans,” he says. “Directors generally serve at least five years and often 10 years. And while the stock market may bounce around, over five or 10 years the stock of a good company will probably rise 10% to 15%.” In his judgment, “Most directors understand and accept that equity is a form of compensation related to the long-term success of their companies, so volatility in one year shouldn’t be of great concern.’’
Even at the most volatile of the dot-com companies, Chingos adds, most directors realized that disaster was always on the menu, right alongside fabulous wealth. “It was a high-risk situation,” he says. “People went in there wanting to contribute and to do everything they could to make it work. The upside was quite significant. So was the downside. If, in the end, the company was not successful, the directors go on to the next opportunity.”
Maybe. But the lessons of the past aren’t lost on newcomers to dot-com boards. Peter Oppermann, who specializes in e-commerce executive compensation at Mercer, notes that since April, some new directors of such companies have demanded that in addition to stock options, their annual comp include cash—usually between $10,000 to $15,000. Dot-com board members can be certain of one thing in the coming months: They’ll work harder for their money. “When a company is not doing well or if the stock is in trouble,” says Oppermann, “there tends to be more work than if the company is going smoothly.”
Adds Korn/Ferry’s Crist: “What April taught everyone was that you can’t create a business on vapors. If you’re contemplating a board assignment, you’re going to be particularly attentive to the business model: Is it a viable business? If not, you’re not going to waste your time.”
As the table shows, traditional pensions are becoming a thing of the past for board members. In 1995, 48% of all companies offered pensions, versus 10% in 1999, according to Mercer. Research by Executive Compensation, meanwhile, found that companies have offset the loss of pensions with increases in grants of stock that can be cashed in after a director retires. Of course, as with any stock arrangement, there’s risk. “A traditional pension plan is a fixed obligation that is paid whether the company achieves its goals or not,” Chingos points out. “With stock options, the future value is a function of the stock price. That’s pay for performance.”
As another means of ensuring that directors’ interests coincide with those of shareholders, more companies are requiring directors to hold substantial amounts of stock. Last year, for example, 18% of the companies studied by Mercer had made it mandatory for directors to hold stock equivalent to several times their annual retainer, excluding stock options. That figure was up from 3.4% in 1994. Dot-coms are not included in this calculation, because Mercer has no data from previous years for comparisons. Among other disappearing benefits: life and accident insurance.
A few primo perks survive. Directors of the Brunswick Corp., for example, get to have fun with all the B products the company turns out: boats, billiard balls, bowling balls, bicep-building gear, among them. Directors get a credit of $4,500 a year toward buying such products (at wholesale), and they also get free use of the boats.
Money (and stock) isn’t everything.
