Corporate-Board Compensation Becomes Delicate Balancing Act




James Mault was preparing to take his medical-device and software company public earlier this year when it came time to consider board compensation. Like some other upstarts, the company decided to pay the six independent members of the eight-person board not with cash or stock, but to award each 10,000 stock options annually.


Then Dr. Mault, a cardiothoracic surgeon who founded HealtheTech Inc., Golden, Colo., came up with an idea to toss in 5,000 additional options for members of the company's audit and compensation committees.


"It became very clear there's going to be a significant burden and responsibility on those committee members. I just wanted to be able to extend a gesture that we recognize that," explains Dr. Mault, who is chairman and chief executive.


As companies digest new federal legislation and stock-exchange rules that seek to prevent more corporate scandals, executives are trying to figure out what to pay board members for the extra duties that are virtually certain to emerge in coming months. Much of the extra burden is expected to fall on board audit committees, which already are conducting longer and more frequent meetings.


For companies thinking about raising board salaries, there's a delicate balancing act. On one hand, directors should be compensated for additional responsibility, say compensation consultants and shareholder advocates. Yet paying outside directors too much could align them too closely to management at a time when independence is valued. Furthermore, shareholders sensitive to exorbitant executive compensation may wince at seeing a company -- particularly one that has seen its stock price fall significantly -- sweeten the pot for members of its board.


"If you pay them too well, you raise questions with the public. If you don't pay them well enough, how do you get good people to sit on the board?" says Jannice Koors , a partner at compensation consultants Pearl Meyer & Partners.


Some companies already pay an extra fee to the board members who lead compensation or audit committees -- two groups that are expected to spend more time on the job in coming months. But directors are feeling even more pressure in the wake of recent high-profile corporate and accounting scandals.


People who attend board meetings say the sessions are lasting longer and being held more frequently as directors pore over business matters previously considered routine. Under the new federal corporate-governance law -- known as the Sarbanes-Oxley Act -- all members of an audit committee must be independent, with responsibility for hiring and overseeing the corporate auditor and establishing procedures for handling complaints.


For many companies, the issue of board compensation doesn't have to be decided right away. Companies set director compensation at the time they issue annual proxy statements, which for most companies are filed with the Securities and Exchange Commission in late winter or early spring. But executives already are bombarding corporate lawyers and compensation consultants with questions about the amount of appropriate payment and whether the consideration should be made in cash or stock, restricted stock, options, or a combination.


"One of the issues being discussed is whether they should increase compensation now on the theory board members, particularly audit committees, are going to spend a lot more time on the job. It's something many companies are thinking about," says John Madden, partner at law firm Shearman & Sterling in New York.


Another issue is that, while companies pay nonemployee board members a fraction of the millions they dole out to top executives, many board members already are well paid. Directors of public companies on average received slightly more than $152,000 in 2001, as board compensation has risen 75% in the past five years, according to a survey of 200 big U.S. companies conducted by Pearl Meyer & Partners. The survey also found that some 62% of the compensation was awarded in the form of stock, most of which was stock options. Therefore, gains in compensation levels are in large part product of the bull market in the late 1990s.


Though shareholder activists and governance groups have lambasted executive compensation levels, so far they aren't attacking the notion of higher board salaries. "Board fees are so modest relative to what anyone in management is collecting. I think someone has to be reasonably compensated to be in that position," says John E. Maloney, president and chief executive of M&R Capital Management Inc., an investment firm with holdings in American Greetings Corp., AT&T and CVS Corp. Mr. Maloney also says audit-committee members should be paid more than other board members.


Carol Bowie, director of the corporate-governance service at the Investor Responsibility Research Center in Washington, D.C., agrees -- with a major caveat. "Investors don't object to paying board members for doing good work. What they object to is paying them for rubberstamping management," she notes. Historically, companies paid board members based on the number of meetings they attended, mostly to encourage them to show up at the sessions. But that changed in recent years and companies began to favor annual retainers, rather than a per-meeting fee. Now, with the number of board and committee meetings expected to increase, the pendulum may swing back toward payment on a meeting-by-meeting basis, say compensation experts.


Some companies are hoping to get guidance on the director compensation in coming months from corporate-governance groups and business-leader organizations, which are assessing the impact of the new federal legislation and stock-exchange rules.


"It's almost as if no one wants to be first. I don't think it's particularly clear what the right solution is," says Gary Locke, who leads the executive-compensation practice of consulting firm Tower Perrins.


Indeed, some companies that recently have filed proxy statements or held annual meetings haven't raised director salaries. Dell Computer Corp., for example, didn't alter its compensation policy when it filed a proxy at the end of May, which was well after corporate governance issues gripped the nation's attention. According to Dell's proxy, the Dallas-based computer maker pays each nonemployee director an annual retainer of $40,000. The director can choose cash, stock options or a deferred-compensation plan payable upon leaving the board. A Dell spokesman said the company hasn't determined that the new rules will result in more work for its board. Dell directors also receive stock options.