The Towers Watson annual analysis of director compensation at Fortune 500 companies found that 2009 pay packages for directors climbed just 1% over 2008 levels. That is smaller than the median increase of 3% directors received in 2008. Prior to the economic crisis, directors had been steadily receiving annual pay increases of nearly 10%.
“Companies have been hesitant about drastically altering pay for their directors, particularly in light of pay cuts, salary freezes and benefit reductions that have been imposed on employees over the past couple of years,” said Doug Friske, head of executive compensation consulting at Towers Watson. “However, we did find that most of the handful of companies that reduced pay for their directors in 2008 have reinstated pay to levels set prior to the economic crisis. In addition, companies are starting to reexamine director pay, consistent with the observed thaw in executive pay levels, particularly in light of the continued increase in director workloads at many companies.”
According to the analysis, total compensation for the outside directors at the companies studied increased to $200,698 last year, up slightly from a median value of $199,949 in 2008. This marks the first time that median total compensation, which factors in the annualized value of one-time equity grants some directors receive when joining the board, has surpassed the $200,000 threshold. Cash compensation increased by 1% (from $83,875 in 2008 to $85,000 last year), while the value of equity awards also increased by a scant 1%, to $104,939 from $103,963 the previous year.
“While most companies are not increasing the level of pay for their outside directors, they are taking a closer look at the various components of director pay programs to find the optimal mix of fixed versus variable fees and to simplify the design of their director pay plans,” said Friske. “Companies are also evaluating how much directors should be paid in cash versus equity, and we anticipate they will continue to shift these components to better align the interests of directors with those of shareholders.”
Indeed, the analysis found that more companies eliminated board and committee meeting fees, and replaced them with fixed retainers for serving on boards and committees. The percentage of companies paying board meeting fees declined from 44% in 2008 to 40% last year, a reversal from 2005, when 60% of companies paid board meeting fees. There was also a decline in companies paying committee meeting fees — from 48% in 2008 to 45% in 2009. The value of compensation previously provided as meeting fees was replaced with corresponding increases to board and committee retainers. Most companies continued to move toward a relatively even mix of cash and equity in their programs.
Among other survey findings:
* Nearly four in 10 (38%) companies operate with a separate chair and CEO, up slightly from the previous year. At the median, nonexecutive board chairs received an additional $150,000 in incremental pay above and beyond that provided for regular board service, bringing their median total pay package to approximately $347,000 in 2009.
* Audit committee members received larger retainers ($10,000 median value in 2009) versus those who serve on compensation committees ($7,500 median value) or governance/nominating committees ($6,000 median value). The higher fees are to compensate directors for added time requirements and responsibilities associated with the enactment of the Sarbanes-Oxley Act.
“Interestingly, the recently enacted financial services reform law may increase demands placed on compensation committee members, and ultimately could lead to higher pay for directors who serve on these committees,” said Friske. “One thing that is clear is that the current state of director pay will continue to evolve in light of changing responsibilities, recruitment challenges and time commitments placed on directors.”
About the Analysis
Towers Watson analyzed the compensation for outside directors at 469 publicly owned Fortune 500 companies that filed their fiscal-year 2009 proxy by June 30, 2010. Data for these companies were then compared against the results obtained from an analysis of 461 Fortune 500 companies in 2009.