While the debate over executive compensation rages on, pay for corporate directors has stalled or was cut back in the wake of layoffs and slowdowns across the economy, according to consulting firms and executive search firms that have looked at board of director compensation trends.
According to Towers Perrin's recently released annual director compensation survey of Fortune 500 companies, overall compensation for directors increased just 3% in 2008, compared with about 10% in recent years, rising to a median of $199,949 last year from $193,965 in 2007.
Board compensation essentially stayed flat in 2008, says Kevin Connelly, chairman of executive search firm Spencer Stuart. "It's likely to still be the case this year, with most of the corporate world still in a wait-and-see mode about the recovery."
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Fully half of the companies in the Towers Perrin survey froze director compensation. Claudia Poster, a principal at Towers Perrin specializing in executive compensation issues, does not expect that situation to change much this year, "although you may see some boards of companies that have done well start making up for last year going forward," she says
Peter Opperman, worldwide partner at Mercer and an expert in board compensation, says a number of larger company boards cut director compensation, "one by as much as 50%," in 2008. "That's a story that hasn't been getting heard, unfortunately," he says.
"Boards of directors have to be in sync with their employees," says Rick Smith, principal and executive compensation leader at Sibson Consulting. "You're not going to see directors giving themselves increased compensation while their companies are still having pay cuts or layoffs."
The tightening of compensation screws in boardrooms is occurring, ironically, at a time when outside directors are being asked to do a lot more work and assume a lot more responsibility and liability. Not only are boards of public companies being asked to consider establishing yet another committee–this one to assess enterprise risk–but the SEC is considering requiring full boards or compensation committees to evaluate whether a company's pay packages, including their own, might encourage "excessive risk taking."
While total compensation is fairly flat, the trend toward fewer options and more full-value stock and toward more stock and less cash compensation is continuing. Towers Perrin reports that in 2008, only 26% of companies gave options as part of their board compensation package, down from 31% a year earlier. Just 7%–mostly technology firms–used only options in the equity portion of their compensation for board members. For the typical Fortune 500 firm, board compensation in 2008 was 54% equity and 46% cash, compared with 51% equity in 2007.
"There's a perception that receiving shares as compensation better aligns the interest of board members with shareholders," says Connelly.
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