PAY INCREASES AGAIN FOR OUTSIDE DIRECTORS, WITH LARGEST
GAINS IN THE FORM OF STOCK-BASED COMPENSATION
NEW YORK, NY, OCTOBER 30, 2001 -- A Towers Perrin survey of non-employee corporate director compensation indicates that median annual compensation has risen to $118,337 in cash and stock in 2001, up from $100,807 in 2000. Most of the increase is in the form of stock-based compensation – especially stock options. On average, companies paid outside directors three-quarters in stock and one-quarter in cash, a noticeable shift from last year’s pay mix of two-thirds stock and one-third cash.
"The growth in the use of stock options is not surprising," said Paula Todd, a Towers Perrin principal. "Stock-based incentives have been playing an increasing role in the pay mix of executives. It makes sense to follow similar compensation policies with outside directors." Ninety-four percent of all companies provided some form of annual or recurring stock compensation to directors, according to the survey.
Median annual stock compensation, based on each company’s 2000 fiscal year-end stock price, jumped 23% to $73,205 in 2001 from $59,430 in 2000. Median cash compensation of $49,000 was up modestly from $46,000 in 2000.
Variety of Company Stock Award Practices
Towers Perrin’s 2001 survey indicates companies use various forms of stock-based compensation for outside directors, with over 40% using more than one type. Seventy-four percent of the companies awarded stock options; 26% made outright grants of stock, and 25% awarded deferred, or phantom stock, which is typically awarded in units that settle upon termination or at some future date. Restricted stock, granted subject to limits on sale or transfer until certain future conditions are met, was awarded by 18% of the companies.
While annual or recurring stock-based grants are common, 29% of the companies surveyed also made one-time grants to outside directors, typically paid when a director is first elected to a board. The median one-time stock-based grant in this year’s survey was worth $151,587, or $18,948 annualized over the average eight-year term of an outside director.
Approaches to compensating directors with cash also varied. Most companies pay outside directors an annual cash retainer, and many companies also make additional smaller payments for attending board or committee meetings. Study results showed a median of $30,000 for the annual cash retainer. For calculation purposes, the study assumed each director attends eight board meetings a year and serves on two committees, being the chairman of one.
"Companies should know the wide range of possibilities that exist in the marketplace for paying outside directors in cash and stock," said Todd. "Pay programs should be tailored to the company’s priorities and philosophy about the role, level and form of directors’ pay. As a result, directors’ compensation policy is receiving increasing attention as a corporate governance priority."
Study results also show that companies have replaced benefit programs for directors with arrangements tied to the value of company stock. Only 4% of companies reported a retirement plan this year, down from 22% four years ago. There has been a slight decline in the use of charitable award programs as well, perhaps related to cost and governance concerns. Other benefits, such as medical insurance and life insurance, are not widely offered.
By contrast, 71% of the companies surveyed offer deferred compensation for outside directors, up from 67% last year. These arrangements often replace cash payments with stock unit accounts that allow directors to accumulate capital on a tax-deferred basis tied to the value of company stock.
The survey is based on annual proxy statements filed this year by 250 companies representing a cross section of the S&P 500 index in terms of industry classification, revenues and market capitalization.
About Towers Perrin
Towers Perrin is one of the world’s largest management and human resource consulting firms. It helps organizations improve performance and manage their investments in people, advising them on human resource strategy and management, change and culture, total rewards (including compensation and benefits), HR technology, and administration and communication, both Web- and print-based. The firm has worldwide revenues of over $1.4 billion and over 9,000 employees and 78 offices in 74 cities worldwide.