COMPENSATION OF THE NON-CEO BOARD OF DIRECTOR.

Are the interests of owners maintained when the Chairman of the Board also is the CEO of the company?

The National Association of Corporate Directors takes a strong position that the roles of CEO and Chairman of the Board are inherently in conflict.

The vast majority of U.S. companies,however, keep the CEO/Chairman role within the same individual. But there is a trend towards separating that role.

William M. Mercer,Inc. an international compensation consulting firm conduted an analysis of 117 companies that keep the roles split. The study focuses on large companies, but some of the concepts might have value for smaller companies as well.

The study also is an excellent overview of the CEO/Chairman debate.

For further information, contact Malcom Hirsch, Jr. at William M. Mercer, Inc. 617/450-6374.

If you have any reactions to this article or thoughts about the CEO/chairman split, we would be delighted to publish it. Simply e mail stybel@aol.com.

STYBEL PEABODY & ASSOCIATES

Boston, MA

Tel: 781/736-0900

Corporate Sponsored Career Effectiveness Consultation for Executives Who Report to Boards, Executives Who Want to Report to Boards, Executives Who Should be Networking at Board levels, and Executives Who Want to Serve on Boards.

KEYWORDS: Board of Director, CEO, compensation, career, retained search, Chairman.

Performance and Rewards

January 27, 1997

P&R #19

Research Communique: 1996 Survey Of Non-CEO Chairman Compensation

Prepared by: Steve Sabow (CRG\NY) Lori Marino (CRG\NY)

Reviewed by: Susan Eichen (New York)

Yale Tauber (New York)

SUMMARY: Compensation Research has prepared the following two exhibits on non-CEO Chairmen of 117 companies with sales in excess of $1 Billion:

Analysis of Non-CEO Chairman Compensation - includes columns presenting: Company name; net sales; CEO compensation; employee Chair compensation; non-employee Chair compensation (Board fees + special Chair compensation + consulting fees); total Chair compensation; Chair compensation as % of CEO compensation; date appointed; and time in position.

Analysis of Special Arrangements with the non-CEO Chairman - includes a paragraph summarizing the provisions of employment and consulting agreements, and other perquisites and benefits provided to a non-CEO Chairman.

According to the analysis, a non-CEO Chairman who has been in such position for a minimum of one year earns a median of $721,797 or 77.3% of the CEO's annual compensation (salary plus bonus) if an employee or $95,500 or 10.4% of the CEO's annual compensation if a non-employee.

Background

Over the past five years, we have accumulated many articles advocating the split between the responsibilities of the Chairman and the CEO. In most cases, one individual still serves as Chairman/CEO. According to the Conference Board's Corporate Directors' Compensation Survey (1996), AThe CEO is still Chairman of the Board in 68 percent of companies,... a decline from the 72 percent reported last year. Another 18 percent report that the Chairman is an outsider rather than an employee. An additional 9 percent have an employee who is not the CEO as Chairman. The remainder did not answer the question...@

The Board of Directors has been charged with the responsibility of serving the interests of shareholders. One of these interests is monitoring the performance and effectiveness of management, including the CEO's. According to Korn Ferry's 1996 Annual Board of Directors Study, ARespondents overwhelmingly rank their responsibility to shareholders as their most important duty as a Board member. Second in importance is selecting the CEO. Outside Directors cited that reviewing the performance of the CEO was Athe third objective of Chairmen.

It has been argued that for the Board to serve shareholders= interests effectively, there should be an independent director serving as the Chairman, and the Board should be comprised, in the majority, of a group of independent non-employee directors. The Report of the NACD Blue Ribbon Commission on Director Professionalism (1996) confirms that AMost Boards of publicly traded companies currently... are comprised of a majority of independent directors. Some Boards today are even choosing to have only their own CEO on the Board as the sole inside director. To ensure Board independence, the NACD recommends that ABoards should define and disclose to shareholders a definition of Independent Director. By having such a Board structure in place, companies can be certain that the CEO"s performance is being monitored by individuals who are not affiliated with the company.

During the past year, proposals to split the Chairman/CEO responsibilities were submitted to a shareholder vote at General Motors and Time Warner. Support for these proposals received 14.7% and 17.9%, respectively, of those voting. The shareholder proposal at GM reads, AResolved: Shareholders recommend the Board of Directors take the necessary steps to ensure that from here forward an independent director serve as Chairman of the Board of Directors. The shareholder proposal further defines an independent Chairman as Aa Chairman that is not currently nor has previously been a GM employee.

Shareholders have also submitted proposals at Archer-Daniels, Duty Free International, General Dynamics and U.S. Surgical to request that the Company's Board of Directors be comprised of a majority of independent directors.

The Archer-Daniels-Midland Company proposal reads AResolved: The shareholders of Archer-Daniels-Midland Company urge the Company's Board of Directors to take the steps necessary to amend the Company's by-laws effective after the 1996 annual meeting, to provide that the Board of Directors shall consist of a majority of independent directors. The shareholder proposal contains a very detailed definition of an independent director which includes similar language to the GM definition including many additional conditions.

1996 Survey

Using the same approach as we employed to prepare our 1993 survey (see Compensation /HR Communique CH #39, 9/17/93), we identified 117 companies in 1996 (versus 79 companies in 1993) with sales in excess of $1 Billion that currently have a non-CEO Chairman; this represents a 48% increase in the number of companies disclosing a non-CEO Chairman in their most recent proxy statement. We also identified 10 companies in 1996 (11 companies in 1993) that have a CEO who is not the Chairman of the Board, but have no individual designated (or disclosed) as the Chairman; these companies are excluded from the survey.

As more and more companies split the responsibilities of Chairman and CEO, we should be prepared to consider the answers to the following questions when asked to evaluate the pay package of a non-CEO Chairman:

Is the non-CEO Chairman currently an employee of the Company?

If yes:

Is the Chairman position a full-time or part-time position?
Is the position intended to be a permanent position?
Was the non-CEO Chairman previously the CEO of the Company and is the current position intended primarily to provide for a smooth transition between CEO's?

If no:

Was the non-CEO Chairman ever an employee of the Company?
If he (or she) was an employee, was he (or she) ever the CEO?
C.Is he a majority investor or shareholder of the Company, or does he represent one?
Is he a completely Aindependent director,@ having no corporate affiliation with the Company?

The answers to these and other questions will help determine how a non-CEO Chairman is paid. Armed with this data, we can advise our clients and offer them guidance, with up-to-date information, on how to pay a non-CEO Chairman (employee or non-employee) and on the special arrangements that many of these individuals receive in order to convince them to serve in such position.

Statistical Highlights - Non-CEO Chairman Compensation

1.Sample - 117 companies with sales in excess of $1 Billion

2.Sales $(000,000)

High

$165,370

75th Percentile

5,383

Median

3,057

25th Percentile

1,564

Low

1,019

Mean

7,161

3.CEO Compensation1

Full Sample

Partial Sample2

High

$7,700,893

$7,700,893

75th Percentile

1,171,917

1,300,000

Median

872,766

860,257

25th Percentile

620,500

612,500

Low

258,794

289,167

Mean

1,063,652

1,100,225

Valid Cases

116

79

In the above chart, we studied the compensation of a CEO who does not also have the responsibilities of the Chairman of the Board. But this raises additional questions:

How much do you pay a CEO who is also the Chairman of the Board?

What is the typical difference between the compensation paid to a CEO who is the Chairman of the Board versus one who is not?

To answer these questions, we queried our Proxy Analysis Database (PAD) to identify companies of a similar size that have a Chairman/CEO.

Company Sales (000,000)

Chairman/CEO Compensation1

High

$6,110

$9,406,229

75th Percentile

5,410

1,566,860

Median

3,114

1,180,000

25th Percentile

1,605

921,325

Low

1,022

399,996

Mean

3,544

1,526,644

Valid Cases

55

55

The following is a side-by-side comparison of the results:

Non-Chairman CEO

Chairman/CEO

Company Sales

(000,000)

Compensation1

Company Sales

(000,000)

Compensation1

75th Percentile

$5,383

$1,171,917

$5,410

$1,566,860

Median

3,057

872,766

3,114

1,180,000

25th Percentile

1,564

620,500

1,605

921,325

At the median, similarly-sized companies pay a CEO who has Chairman responsibilities over one third (35.2%) more than a CEO who does not have such responsibilities. There may also be factors impacting these results, e.g., industry or CEO tenure, that are not considered in this comparison.

1 Compensation is defined as the sum of salary plus bonus.

2 Excludes CEO's of companies where the non-CEO Chairman has held such position for less than one year.

4.Non-CEO Chairman3 Compensation

PRIVATE

Employee4

Non-Employee5

Combined

High

$7,700,893

$1,596,000

$7,700,893

75th Percentile

1,149,648

198,194

632,395

Median

721,797

95,500

250,004

25th Percentile

399,648

37,500

71,300

Low

195,000

22,200

22,200

Mean

1,016,136

169,053

525,720

Valid Cases

32

44

76

5.Non-CEO Chairman3 Compensation as % of CEO Compensation

Employee4

Non-Employee5

Combined

High

197.3%

83.0%

197.3%

75th Percentile

100.0

19.2

75.3

Median

77.3

10.4

25.6

25th Percentile

52.8

5.9

8.9

Low

26.4

1.2

1.2

Mean

81.6

15.9

43.4

Valid Cases

31

43

74

6.The components of non-employee non-CEO Chairman compensation reflect a combination of the following:

Directors' fees3 (total annual director compensation, excluding value of stock option grants) assuming director attends all Board and Committee meetings - 38 cases that range from $6,000 to $60,000, with a median of $36,000.

Special Chairman Compensation - 28 cases that range from $6,690 to $500,000, with a median of $100,000.

Special Consulting Fees - 12 cases that range from $81,250 to $1,570,000, with a median of $200,002.

7.For 117 Chairmen, we were able to determine whether they had ever been the CEO in prior years.

81 had been CEO (69.2%)

36 had not been CEO (30.8%)

3 Non-CEO Chairmen have held such position for a minimum time period of one year. This requirement enables us to effectively eliminate transitional appointments of less than one year.

4 Compensation is defined as the sum of salary plus bonus.

5 Compensation is defined as the sum of annual directors' fees paid in the form of cash and/or shares, special Chairman compensation and consulting fees.

8.For 1186 Chairmen, we were able to determine whether they had ever been an employee in prior years.

97 had been an employee (82.2%)

21 had not been an employee (17.8%)

9.What's the typical age of a non-CEO Chairman?

PRIVATE

Employee

Non-Employee

Combined

High

79

79

79

75th Percentile

68

69

68

Median

64

65

65

25th Percentile

57

61

60

Low

43

38

38

Mean

63

63

63

Valid Cases

58

60

1186

10.How long has the current non-CEO Chairman held this position?

Less Than One Year

29.3%

One Year

18.1

Two Years

16.4

Median

Three or Four Years

14.7

Five or Six Years

11.2

Seven or Greater Years

10.3

As one might expect, there is a direct relationship between time in position and percent of CEO compensation paid to a non-CEO Chairman. As time in position increases, the percent of CEO compensation decreases.

Non-CEO Chairman Compensation as % of CEO Compensation After Time In Position of:

PRIVATE

1 Year

2 Years

3+ Years

Employee Median

97.4%

79.7%

67.4%

Non-Employee Median

14.7

14.3

7.8

6 One company has two CEO's.

11.Is a non-CEO Chairman who is a former CEO paid more than a non-CEO Chairman who has never been CEO?

Employee

Non-Employee

Was CEO

Never Was CEO

Was CEO

Never Was CEO

High

$7,700,893

$1,924,693

$1,596,000

$500,000

75th Percentile

1,225,047

*

254,394

143,042

Median

780,036

663,558

115,250

69,500

25th Percentile

409,501

*

40,000

35,000

Low

195,000

250,000

22,200

30,000

Mean

1,086,853

763,574

208,535

106,348

Valid Cases

25

7

27

17

According to the statistics, a non-CEO Chairman who is a former CEO will typically be paid more than a non-CEO Chairman who has never been CEO. Since this chart does not adjust for company size, let's review this same information (non-CEO Chairman compensation) as a percent of CEO Compensation.

PRIVATE

Employee

Non-Employee

PRIVATE

Was CEO

Never Was CEO

Was CEO

Never Was CEO

High

197.3%

107.9%

83.0%

27.9%

75th Percentile

97.5

*

24.6

16.4

Median

76.9

92.0

12.5

9.2

25th Percentile

51.9

*

5.7

6.2

Low

26.4

33.7

1.2

2.1

Mean

81.6

81.7

19.0

11.0

Valid Cases

24

7

26

17

When you present this data as a percent of CEO compensation, the non-CEO Chairman who never was CEO is paid more (at the median) than one who was CEO; but, at the average, there is no discernible difference in pay. Also, since there are so few cases of employee non-CEO Chairmen who have never been CEO, it's difficult to make a supportable conclusion. But, in most cases, employee status has a substantial impact on non-CEO Chairman compensation.

* Insufficient number of cases to be meaningful.

12.Historical Comparison

The following represents a comparison between the 1996 and 1993 survey statistics (all figures are medians unless otherwise noted):

1993

1996

Sample

79 Companies

117 Companies

Sales (000,000)

$ 2,223

$ 3,057

CEO Compensation7

832,590

860,257

Non-CEO Chairman8 Compensation

- Employee

575,000

721,797

- Non-Employee

126,175

95,500

- Combined

293,000

250,004

Non-CEO Chairman8 Compensation as % of CEO Compensation

- Employee

68.0%

77.3%

- Non-Employee

13.4

10.4

- Combined

28.0

25.6

Can we make any general statements comparing the statistics from these two surveys? Based on the statistics, we would have to conclude that employee non-CEO Chairman compensation is on the rise whereas non-employee non-CEO Chairman compensation is declining.

But before we jump to these conclusions, let's review the facts. We know the following:

35 (44.3%) of the 79 companies from our 1993 survey still have a non-CEO Chairman.

Of these 35 companies, 27 (77.1%) have the same non-CEO Chairman they had in 1993.

The non-CEO Chairman is currently an employee at 10 of the 27 companies, while 17 companies have a non-employee non-CEO Chairman.

The non-CEO Chairman at 18 companies was a prior CEO of the company; the non-CEO Chairman was never the CEO at 9 companies.

7 Excludes CEO's of companies where the non-CEO Chairman has held such position for less than one year.

8 Non-CEO Chairmen have held such position for a minimum time period of one year. This requirement enables us to effectively eliminate transitional appointments of less than one year.

The following represents a comparison between the 1996 and 1993 survey statistics for the constant population of 27 companies (all figures are medians unless otherwise noted):

1993

1996

Sample

27 Companies

27 Companies

Sales (000,000)

$ 2,336

$ 3,057

CEO Compensation

832,590

902,024

Non-CEO Chairman Compensation

- Employee

558,128

645,276

- Non-Employee

135,425

120,625

- Combined

225,000

195,000

Non-CEO Chairman Compensation as % of CEO Compensation

- Employee

67.3%

65.6%

- Non-Employee

13.4

8.1

- Combined

35.8

17.9

It seems our original observations that employee non-CEO Chairman compensation is on the rise and non-employee non-CEO Chairman compensation has declined are in fact also supported by this new constant population analysis. But now the statistics are more compelling:

While actual dollar amounts have increased substantially, employee non-CEO Chairman compensation as a percent of CEO compensation has gone down slightly between 1993 and 1996,

Non-employee non-CEO Chairman compensation as a percent of CEO compensation has gone down dramatically between 1993 and 1996.

Statistical Highlights - Special Arrangements with Non-CEO Chairman

34 (29.1%) of the 117 companies disclosed the provisions of special arrangements with the non-CEO Chairman of the Board. 50% of these arrangements were for non-employee Chairmen, while 50% were for employee Chairmen.

The agreements with the employee non-CEO Chairmen include the following provisions that were disclosed:

# %
Minimum salary plus bonus 14 82.4%
Eligibility to participate in benefits, perquisites and/or incentive plans 7 41.2
Consulting Agreement 7 41.2
Secretarial support 2 11.8
Office & related expenses 2 11.8
Medical, insurance and other benefits 1 5.9
Additional SERP credit 1 5.9
Severance (Other than change in control) 10 58.8
Non-Compete 6 35.3

The agreements with the non-employee non-CEO Chairmen include the following provisions that were disclosed:

# %
Consulting agreement and/or special compensation arrangement 16 94.1%
Continued participation in benefits, perquisites and/or incentives 6 35.3
Office 3 17.6
Secretarial support 3 17.6
Reimbursed expenses (not specified) 2 11.8
- Club memberships 2 11.8
-Automobile 2 11.8
Supplemental Retirement 1 5.9
Non-Compete 1 5.9

The majority of the agreements with the employee non-CEO Chairmen provide for: a minimum salary and bonus; eligibility to participate in benefits, perquisites and/or incentives; a post-retirement consulting agreement so that the Company can take full advantage of the continued guidance of the retiree; and for severance payments in the event of termination of employment. Many of the agreements also provide that the individual may not compete with the Company or disclose confidential information about the Company during the period of employment and for a designated period thereafter.

The majority of the agreements with the non-employee non-CEO Chairmen provide for a consulting agreement and/or some other form of special compensation arrangement with the Company. Many of the agreements provided: continued participation in benefits, perquisites and/or incentives; office and secretarial support; and reimbursement of expenses (including club memberships and/or automobiles).

Conclusion

There continues to be an increase in the number of companies providing for two different individuals serving as the Chairman of the Board and the Chief Executive Officer.

While over two-thirds of the non-CEO Chairmen had originally served in the dual role of Chairman and CEO, almost one-third of the companies have a non-CEO Chairman who has never been the CEO. (These statistics have actually changed very little over the past three years.)

Almost 50% of the non-CEO Chairmen have served as such for one year or less, which also means that over 50% of them have served as the non-CEO Chairman for greater than one year. (Time in position is a median of two years.)

Thus, should we see an increase in the number of companies appointing independent Chairmen, we will likely see an eventual increase in their time in position and a corresponding increase in the typical age of a non-CEO Chairman. (The age of an employee non-CEO Chairman tends to be lower than the age of a non-employee non-CEO Chairman.)

But, for the time being, the non-CEO Chairman position is typically held by the previous CEO for a short-period of time (ranging from 3 months to two years) to provide for an orderly succession of management.

For further information, contact Malcom Hirsh, Jr. Of William M. Mercer at 617/450-3674.

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