Prevailing Board Comp Practices in Flux

August 25, 2004 ( - Companies increased their total director compensation by 19% in 2003 and shelled out more fees to lead directors and audit committee members.

A recent survey of director pay trends by Towers Perrin found that the median total compensation (cash and stock retainers, plus fees) for outside directors was $140,350, up 19% from the prior year. Stock options are valued using the Black-Scholes model.

Among the other director compensation changes were the 6% of companies who eliminated meeting fees in favor of a single cash retainer while the prevalence of companies paying board meeting payments decreased from 70% to 66%. The number of companies paying committee meeting fees fell from 71% to 69% while 28% of companies now pay cash retainers and offer no meeting fees.

“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.

According to the findings, companies are cutting their use of stock options, with only 54% of companies employing stock options in fiscal 2003 compared to 63% in fiscal 2002. Also 12% of responding firms dropped their annual stock option grant and a third 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% of compensation delivered in cash and 60% 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 a year earlier. The percent of companies awarding restricted stock to their directors jumped six percentage points to 28%, with 68% of companies giving
some form of full-value shares (restricted, common or deferred) to their directors in fiscal 2003 – up from 63% in 2002.

Eleven percent of companies in the study paid additional fees to a lead director. The lead director received an additional average $27,160 in compensation. Twenty-three percent of companies pay an additional retainer for service on at least one committee. Of those, 62% pay a premium for service on the audit committee.

Some 27% of companies allow directors to elect stock in lieu of cash. Of those, 24% 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 to 1% in 2003 (from 2% in 2002).

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.