Compensation levels for corporate directors in the U.S. have increased significantly
over the past year, according to a recent study by the Hay Group, a human resources
and organizational consulting firm.
Factoring in changes in stock price, direct compensation packages have increased
by approximately 30 percent for what the Philadelphia-based organziation describes
as the "median" director.
The Hay Group said it examined year-over-year changes in director compensation
levels of S&P 1500 companies. Data was collected by the Investor Responsibility
Resource Center (IRRC) from proxy statements filed with the SEC before July
31, 2003. Hay identified changes in both fixed elements, such as per meeting
fees and annual retainers, and variable elements, such as total meeting fees,
to determine prevalence and levels of change to a company's director compensation
Over 47 percent of the S&P 1500 companies modified at least one component of their
director compensation program resulting in a median increase of over 13 percent to
the total direct compensation of their board members.
On the surface, these changes appear modest given that most experts anticipated
a sizable increase in the overall level of director compensation, according
to the Hay Group. But since the median stock price in the group declined by
approximately 16 percent, and a majority of director compensation programs denominate
director equity compensation as a fixed number of shares, it is not surprising
that equity valuations would be impacted accordingly. Factoring in changes in
stock price, the median director total direct compensation package actually
increased by approximately 30 percent.
This increase is largely the result of new regulations that have effectively
reduced the pool of qualified independent directors, as well as increased personal
risk, commitment, and accountability in today's governance climate.
Stock options still prevalent
The study also revealed that companies are continuing to rely heavily on stock
options. Stock option use declined by only 2 percent to 72 percent of all S&P
1500 companies. Use of restricted/deferred stock increased to 28 percent of
S&P 1,500 companies up from 24 percent in the prior year.
It is likely that director compensation will continue to grow, according to
Bill Gerek, the Hay Group's director of global executive compensation research."Many
companies are hesitant to make large increases in one year and may phase-in
enhancements of director pay over a period of years to fully absorb the new
realities of corporate governance," he said.