Stock Options Make Up Less of Outside Directors' Pay

July 22, 2004 ( - Corporate America is reducing its reliance on stock options as a compensation vehicle for outside directors, turning to increased fees paid to directors instead.

Total remuneration for directors at 469 publicly owned constituents of the Fortune 500 list increased 19% at the median from $118,280 to $140,350. This increase was fueled both by cash and stock. Total cash increased 14% at the median; total recurring, stock compensation increased 17% at the median, according to analysis conducted by Towers Perrin.

Even though the mix of cash and stock did not change – companies delivered 40% of a director’s total pay in cash and 60% in stock in both 2003 and 2002 – what did change was the grants of full-value shares in lieu of stock options.   Towers found more than half (54%) of the companies examined used stock options to compensate their directors in 2003, a noticeable decline from 63% in 2002. At the same time, more than two of three companies (68%) awarded at least one type of these shares to their directors in 2003, compared with 63% doing the same in 2002.

Further, Towers found more companies are requiring that directors have a stake in the company by instituting stock ownership guidelines. More than a third (35%) disclosed the existence of stock ownership guidelines in either their proxy or in corporate governance guidelines posted on their Web site, up from 19% in the prior year.   The most common form of a director stock ownership guideline is a requirement that the director hold a designated multiple of compensation, generally the board retainer; approximately half of the companies have guidelines structure ownership based on a multiple of board retainer, and the most common multiple is five.

A copy of the full report is available here .