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April 1, 2001



As the Market Goes, So Go the Rewards of Company Directors





Chief executives of big companies may have been largely insulated from the stock market's swoon, but many outside directors have not. These board members, often paid largely in stock or stock options, are feeling shareholders' pain this year, according to an analysis by Pearl Meyer & Partners, an executive compensation consultant in New York that reviewed proxy statements at 72 of the 200 large companies it regularly surveys.


Directors at corporate giants like General Electric, Goldman Sachs and Compaq Computer have seen the value of their compensation fall this year, at least on paper, by tens of thousands of dollars, according to Pearl Meyer, whose estimate of a typical director's compensation includes a value placed on the stock or stock options doled out. At Compaq, for example, total compensation for a typical director declined more than $100,000, to around $250,000, as the company's shares have fallen.


"It's working exactly the way it is supposed to," said Nell Minow, a longtime shareholder activist who is now editor of the Corporate Library (, a Web site on corporate governance.


In addition to paying directors their retainers in cash or stock, many companies have moved to stock options. "Today, we are finding more and more companies adding options," said Rhoda G. Edelman, a managing director at Pearl Meyer.


Consider Hewlett-Packard. While three-quarters of its annual $100,000 retainer has traditionally been paid in stock, according to the company's proxy statements, outside directors were also given a one-time option grant for 40,000 shares last year. Their value helped push total compensation for a typical Hewlett- Packard director to about $265,000.


Hewlett-Packard made the awards as part of its overall effort to link pay to performance, a company spokesman said, and to remain competitive in paying directors.


Companies have long expected directors to own some shares, but the push to compensate directors with some form of stock came about over the last decade. It stemmed from a desire to align their interests with those of shareholders. "The person needs to have some skin in the game," said Donald C. Hambrick, a business professor at Columbia University. But Mr. Hambrick, for one, worried that some directors might view options as "found money" and behave differently than they would if they actually owned a significant stake in a company, especially one they bought with their own money.


Some companies still rely largely on cash. At Genuine Parts, the auto parts maker based in Atlanta, the directors are paid in cash $49,000 a year, according to Pearl Meyer. Their relatively small equity stakes put them among the lowest-paid directors of the large companies evaluated.


The directors, all of whom own some company shares, have the option of taking their pay in stock, said Jerry Nix, the chief financial officer of Genuine Parts, and some have done so. "They're capable of making their own decision," he said.


While some companies, like Hewlett-Packard, are increasing the amount of equity they give to directors, Ms. Edelman said compensation for directors was likely to remain stable in the coming year, at about $140,000, at the 200 companies it evaluates. Only one-fourth of the 72 companies reviewed have chosen to give directors more equity this year.


But the increase in equity as a form of compensation has led to six- figure pay packages for many board members in the last few years. A typical director at the 200 large companies can expect to receive roughly twice as much as he or she could expect in 1994, when the pay averaged $79,000, according to Pearl Meyer.


At the high end, the figures can be stunning. Cisco Systems, for example, pays a typical director more than $650,000, virtually all in equity, according to Pearl Meyer, which estimated the equity's value at the company's stock price at the time of its annual meeting last fall. Cisco pays its directors with equity to align their interests with shareholders, a

company spokesman said.


One executive whose directors are among the highest paid defended the largess. "You're not paying them for the actual time spent," he said, speaking on condition of anonymity. Directors may find themselves spending inordinate amounts of time if companies have unexpected debacles, whether a result of a failed strategy or the discovery of accounting fraud. "You're paying them for carrying the responsibility, losing a night's sleep," he said.