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Compensation for Corporate Directors Increased Moderately in 2010, Towers Watson Analysis Finds

Posted on 26 Oct 2011

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Compensation for outside directors at the nation’s largest corporations increased moderately last year, fueled mostly by the largest increase in the value of equity awards since 2006, according to a new analysis by Towers Watson, a global professional services company. The analysis also found that more companies replaced board and committee meeting fees with fixed retainers for service.

The Towers Watson annual analysis of director compensation at Fortune 500 companies found that total compensation for directors climbed 6% in 2010 over 2009 levels. That is significantly larger than the 1% median increase directors received in 2009, but still below the nearly 10% annual increases directors had been receiving prior to the economic crisis. Specifically, the analysis showed the following changes to outside director pay packages:

• Total compensation increased in 2010 to a median value of $212,512, up 6% from $200,698 in 2009. Total compensation includes cash, annual or recurring stock, and factors in the annualized value of one-time equity grants some directors receive when joining the board.

• Cash compensation increased by 5%, from $85,000 in 2009 to $89,000 last year.

• Equity award values jumped 9% in 2010 to $114,728, from $104,939 in 2009. The 9% increase is the largest jump in equity award value since 2006.

• Pay mix: More than half (54%) of director pay came from equity in 2010, while 46% was from cash. That compares with 52% from equity and 48% from cash in 2009.

• Similar to executive pay trends, director pay levels increased in 2010, consistent with improved financial and stock performance,” said Doug Friske, global head of executive compensation consulting at Towers Watson. “These changes also reflect increased demands placed on outside directors in terms of the time commitment as well as the level of debate, discourse and discord among directors. The question is whether this trend can continue, given growing uncertainty around the sustainability of the recovery.”

• The analysis found a continuing trend to eliminate board and committee meeting fees in favor of fixed retainers for service. In 2010, only 36% of companies paid board meeting fees, a sharp decline from 62% in 2004. There was also a decline in companies paying committee meeting fees — from 64% in 2004, to only 40% last year. As companies eliminated meeting fees, they boosted the value of annual cash retainers to compensate directors for meeting preparation and attendance.

Among other survey findings:

• Although a majority of companies combine the roles of CEO and board chair, nearly four in 10 companies (39%) operate with a separate chair and CEO. At the median, nonexecutive board chairs received an additional $150,000 in incremental pay above and beyond that provided for regular board service.

• The use of stock ownership guidelines and retention policies has become an integral part of director pay programs. In 2010, 83% of companies had either or both types of mandates. The median value of stock ownership required for directors subject to stock ownership guidelines increased from $250,000 to $300,000 in 2010.

“While director compensation has largely flown under the radar for most companies, increased director pay levels and the ever-growing scrutiny of executive pay, in general, may position director pay more in the spotlight down the road,” said Friske. “Companies should carefully consider the need to pay competitively and appropriately reward directors for their many contributions within the context of the overall business environment.”

About the Analysis

Towers Watson analyzed the compensation for outside directors at 464 publicly owned Fortune 500 companies that filed their fiscal year 2010 proxy by June 30, 2011. Data for these companies were then compared against the results obtained from an analysis of 464 Fortune 500 companies in 2010