Overall Director Comp Up Sharply in 2004

August 29, 2005 (PLANSPONSOR.com) - The times are definitely changing in the C-suite with, among other things, a sizable compensation bump for directors of large US companies, a new study found.

A news release from Mercer Human Resource Consulting (Mercer HR) said its research found that the directors saw their compensation packages jump by 18% in 2004. Specifically, the total for board service, committee service and equity grants for directors at 350 large, public firms totaled $155,000 in 2004 – up from $132,000 the year before.

Mercer HR also found that the use of stock options as a part of director compensation has declined greatly while restricted stock has increased in popularity. Equity represents 55% of total direct compensation in 2004, up from 51% in 2003.

Nearly all (98%) of the companies studied pay their independent directors an annual retainer. Median board retainers increased 25% from $40,000 in 2003 to $50,000 in 2004, after remaining flat from 2002 to 2003.

In addition to annual retainers, most companies also pay directors a fee for attending board meetings. The median board meeting fee has remained unchanged at $1,500 per meeting for the past four years. But the prevalence of board meeting fees has been declining as companies evaluate fixed (retainer) versus variable (per meeting fee) director compensation, Mercer HR said.   Last year, 64% of companies paid board meeting fees, down from over 70% in 2002 and almost 75% in 2000.

Mercer also found that the prevalence of lead directors and non-employee chairmen has increased dramatically in recent years.

Over time, Mercer expects less variability and more transparency and simplicity in director pay programs, the company said in the announcement. As audit and compensation committees tackle their share of hot topics, for example, their workloads may converge down the road, reducing both the differences in compensation among committees and the need to pay directors on a per meeting basis.

Mercer’s predictions include:

  • Retainer levels for board service will continue to increase as companies eliminate board meeting fees and shift the value to fixed annual retainers.
  • Committee meeting fee levels will remain constant, but their prevalence will decrease as companies shift to committee member retainers. 
  • Committee chair retainers will continue to increase in value and prevalence. But the distinction among committee chairs will lessen as the demands of Sarbanes-Oxley compliance, FAS 123R, and deferred compensation reform diminish.
  • The lead director role and responsibility will expand and become more transparent. In turn, additional compensation will be more prevalent and premiums will increase.
  • Equity compensation will be delivered through full-value shares, rather than options. In addition, the balance between cash and equity will remain roughly equal.
  • Stock ownership guidelines and holding requirements will continue to increase in prevalence as companies continue to react to shareholder concerns. The practice of basing guidelines on a multiple of the annual retainer will diminish in favor of a multiple of the annual equity grant.

The study is  here . A free registration is required.