Human Capital & Careers

Study: Director Pay Hikes Slowing Down

Further, fewer companies are making stock options a component of directors' compensation packages, with 53 percent providing them 2005— down from 5...
Stephen TaubAugust 8, 2006

Median total direct compensation for directors of large U.S. companies in 2005 rose by less than one-third the percentage it did in 2004, according to a new study by Mercer Human Resource Consulting.

The increase in median total direct compensation—which included pay for board and committee service and equity grants—increased 6.1 percent in 2005, to $164,63, the study, which was based on an analysis of proxy statements of 350 mostly large publicly traded U.S. companies, found.

In contrast, board members’ median total direct pay rose 17.8 percent between 2004, according to Mercer.

Nevertheless, directors at the largest companies—those with revenues exceeding $10 billion—did well in 2005, with median total direct pay topping $187,000.

Director pay surged immediately in the wake of recent high-profile corporate scandals and the passage of Sarbanes-Oxley, which made more demands on directors and underscored growing potential liability among those individuals who agree to serve on boards, according to Mercer’s analysis.

Now, apparently, director pay increases are easing up somewhat after the initial surge that reflected the added responsibilities and heightened scrutiny.

The study also underscored how the components of compensation have been changing over the past few years. For one thing, fewer companies are making stock options a component of directors’ compensation packages. Mercer found that 53 percent of directors received stock options as part of their 2005 package, down from 59 percent in 2004 and 66 percent in 2003.

On the other hand, 63 percent of directors last year received full-value equity awards—often in the form of restricted stock—up from 58 percent in 2004.

The trend away from options and to full-value shares tracks the movement for top executives at U.S. firms. “Ownership, or having a stake in a company’s shareholder value, is more appropriate than a ‘leveraged’ award for increasing stock price,” said Peter Oppermann, a senior executive compensation consultant at Mercer.

At the same time, Mercer’s study also showed that total annual compensation for directors jumped a median 6.7 percent, from $75,000 in 2004 to $80,000 last year, helped in large part by double-digit jumps in median cash retainers and median stock retainers.

On the other hand, some elements of pay remained flat. For example, Mercer found that board and committee meeting fees both remained constant at $1,500. In a continuing trend, fewer companies (214) paid board meeting fees last year than they did in 2004 (224). “That reflects the change in how boards work, with more meeting preparation and time spent outside of meetings to fulfill fiduciary duties,” according to the firm.