Stamford, Conn. --Companies increased the total compensation for members of the board of directors by 19 percent in 2003, and paid additional fees to ‘lead directors’ and members of the audit committee, according to a recent survey of director pay trends by Towers Perrin.
The Towers Perrin research includes pay data and practices taken from 2004 proxies filed by 469 of the Fortune 500 companies. The annual research project was conducted by Towers Perrin's Executive Compensation Resources, the data collection, analysis, research and information services unit of Towers Perrin's HR Services business Executive Compensation consulting practice.
"In the two years since the July 2002 passage of the Sarbanes-Oxley Act, companies have taken great strides in improving corporate governance, and have made corresponding changes in the manner and level of their pay for outside directors," says John England, Managing Principal in the firm's HR Services business Executive Compensation consulting practice. "The study found that companies are compensating directors more highly, aligning director pay with extra responsibilities for certain key roles, such as audit committee service, and in some cases, shifting from per-meeting fees to board cash retainers."
"Companies continue to believe that their board members should hold equity stakes in the enterprise," says England. "However, more companies are changing the equity mix toward ‘full-value share,’ such as restricted stock, while decreasing the proportion of options."
Director Pay Rises
The median total compensation for outside directors in the study was $140,350, up 19 percent from the prior year. Total compensation consists of cash and stock retainers, plus fees for board and committee meetings. Stock options are valued using the Black-Scholes model.
Six percent of the companies in the study eliminated meeting fees in favor of a single cash retainer. The prevalence of companies paying board meeting fees decreased from 70 percent to 66 percent. And the prevalence of companies paying committee meeting fees decreased from 71 percent to 69 percent. Twenty-eight percent of companies now pay cash retainers and no meeting fees of any kind.
Stock Option Grants Decline
According to the findings, companies are decreasing their use of stock options, with only 54 percent of companies in the study using stock options in fiscal 2003 compared to 63 percent in fiscal 2002. Additionally, 12 percent of companies eliminated their annual stock option grant and 30% of companies increased the full-value share portion of their total annual/recurring stock. Thirty-five percent of companies now have stock ownership guidelines for their directors.
In 2003, the mix of cash/stock remained unchanged, with 40 percent of compensation being delivered in cash and 60 percent being delivered in stock. Ninety-two percent of companies made an annual or recurring stock award (options, restricted, deferred and common) to their directors in fiscal 2003 -- unchanged from 2002. Companies providing an initial or one-time stock grant for their directors fell one percentage point, from 2002 to 28 percent. And the percent of companies awarding restricted stock to their directors jumped six percentage points to 28 percent, with 68 percent of companies awarding some form of full-value shares (restricted, common or deferred) to their directors in fiscal 2003, compared to just 63 percent in 2002.
Compensation Reflects Expanding Board Responsibilities
Eleven percent of companies in the study paid additional fees to a lead director. At the average, the lead director received an additional $27,160 in compensation. Twenty-three percent of companies pay an additional retainer for service on at least one committee. Of those, 62 percent pay a premium for service on the audit committee. This compares to 20% of companies paying a committee service retainer in 2002 and 49 percent of those paying a premium for audit committee service.
Eighty-one percent of companies pay an additional retainer to a committee chair. Of those, 48 percent pay a premium to the chair of the audit committee. This compares to 71 percent of companies paying a committee chair retainer in 2002, with 26 percent of those paying a premium to the audit committee chair. The average meeting fee for the audit committee is 7 percent higher than the average meeting for a "typical" committee member. And audit committees held 21 percent more meetings in 2003 than in 2002.
Additional Key Findings
- 27 percent of companies allow directors to elect stock in lieu of cash. Of those, 24 percent offer a premium to directors who take their pay in stock rather than cash
- The number of companies offering a cash retirement plan continues to decline -- down to 1 percent in 2003 (from 2 percent)
- The prevalence of various insurance policies remains fairly constant
- Life insurance -- was offered by 8 percent of companies in 2003 and 2002
- Travel insurance -- was offered by 9 percent in 2003 and 2002
- Med/dental insurance -- was down one percentage point, to 3 percent in 2003
- 10 percent of companies offer a matching gift program for their directors, up from 8 percent in 2002, while 6 percent of companies have a charitable giving program for their directors, down from 7 percent
- 2 percent of companies penalize directors for not meeting an attendance requirement, up from 1 percent in 2002
- Less than 1 percent of companies offer a cash bonus for their directors, down slightly from 1 percent in 2002