Hewitt: Most Companies Change Board Compensation in 2003

May 22, 2003 (PLANSPONSOR.com) - Nearly six out of 10 companies made some change to their outside board of director compensation in 2003 in the face of stronger corporate governance and the subsequent sudden shortage of qualified board candidates.

The number of companies making a change represents a significant run up.   Normally, only 35% to 40% of companies make a change to their director pay in a given year, according to Hewitt Associates’ “Timely Topic Study on US Board Compensation” report.

The scramble to find qualified candidates has led 36% of the companies studied with board retainers to increase them this year, bringing the median cash retainer for a board member to $35,000. Among the increases, the median cash retainer for audit committee chairs doubled to $10,000 in 2003 where compensation committee chairs did even better; seeing the median increase to $7,500 from $3,500 the year before.   Further, there are several committees where a significant proportion of companies do expect more meetings, which includes Governance, Nominating, and Audit.

As for meeting fees, 22% of the 187 companies which provided committee member meeting fees are paying more this year and 20% of organizations with board member meeting fees are increasing them in 2003. The median fee paid per meeting in 2003 is $1,250, with the majority of companies not expecting their boards will change the number of meetings held per year.

Taking Stock

The crunch though has many companies finding themselves mired in a quagmire.   “Many companies are caught between the need to increase board pay to attract high-caliber talent and a reluctance to do so, given the current economy and poor corporate financial performance. We believe these supply and demand issues ultimately will result in a 15% to 20% increase in board pay during the next couple of years,” Michael Powers, leader of the Executive Compensation Practice for Hewitt, said in a statement.

Among the changes being made is companies moving toward restricted or deferred stock units, in an effort to provide alignment with shareholders and eliminate the perception that directors are acting on inside information when exercising stock options, Powers said.   Currently, 73% of companies surveyed offer stock options as part of board compensation and 65% provide deferred, restricted or outright stock/units.

One way to affect change would be to alter or implement director stock ownership guidelines, currently employed by 67% of those surveyed and to put in stock holding requirements, since 81% do not require stock be held by directors for a set period of time. Of the 19% that do have mandatory stock holding requirements, more than two-thirds said board members need to hold stock for their entire board tenure.

However, change may be slow.   Of those offering stock options to the board, 82% do not plan to change to another form of stock incentive, at least in 2003. As for the remaining 18%, approximately half are changing to restricted stock units and nearly a quarter are switching to deferred stock units.

The use of benefits and perks as part of board compensation is being offered by about half of those queried:    52% offer benefits and 49% offer perks. Of those companies offering benefits, travel/accident insurance is the most popular (37%). Where the most popular perks include a charitable matching gift program (30%) and first-class air travel (24%).