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Key7 Compensation in theory and practice: do directors deserve what they earn?

Leave it to corporate management to develop a payment plan for directors even more complex than the union scale for the Screen Actor’s Guild. Consider the types of fees found in Fortune 500 companies:

Retainers. These are annual fees paid to directors regardless of what they do---even if they do nothing. Retainers fees could be called the price a corporation pays to someone like Vernon Jordan for the right to associate its name with his. Henry Kissinger, Laura Tyson, the former chief economic adviser to President Bill Clinton, and George Mitchell, the former Senator, to name just a few, don’t come cheap. In 1998, annual retainers ranged from $7,000 to $10,000.

Meeting fees. These are the fees directors are paid to attend board and committee meetings. If you pay them, the theory goes, they will come. How do you get a big name you have retained to actually come to your board meetings? You pay them enough to make it worthwhile. Fees for meetings range from $100 to $7,000. And some companies trade off. They have lower retainers but pay well for meetings. Some companies vary their meeting fees---the fee for a board meeting is higher than the fee for a committee meeting. Some even pay more for a committee meeting held on a different day from the regular board meeting.

Payment in shares. This type of compensation is viewed as an incentive plan for directors. The more shares you own, the more you will pay attention to running the company well. The better the company does and the higher its share price goes, the better your compensation.

Performance-based stock options. At SYSCO, Inc., an international food distributor, and Dun and Bradstreet, directors are given share options based on performance targets. Referred to as performance shares, directors can obtain up to 1,000 share options if the company reaches a certain level of performance, for example, matching the 50th percentile of the S&P 500 returns. If the company comes in beneath the target, the directors may get nothing or only a percentage of the potential grant.

Pension and retirement plans. This form of compensation, which has raised a ruckus among many shareholder activists, is often labeled an inherent conflict of interest as well as a problem when it comes to getting directors to leave.

Charitable contributions. Some companies agree to make an annual charitable contribution to a director’s favorite non-profit organization. Others provide a contribution upon the director’s death, which is often paid out of the proceeds of a life insurance policy paid for by the company.

Deferred compensation plans. Some companies permit directors to defer their compensation through a modified 401(k) plan. Directors can defer their fees until after their retirement from their own jobs.

Consulting fees. Henry Kissinger earned them from American Express while serving on its board. If the consulting fees truly are for work performed for the company, then, at certain levels, there must be public disclosure. Consulting fees create an inherent conflict of interest, though, meaning that the recipient no longer qualifies as an independent director. The level and type of compensation for directors continues to be a sensitive issue with shareholders and, as a result, a sensitive issue with managers. Reform suggestions include elimination of the cash-only retainer fee in exchange for stock equivalents. Many experts believe that 50% cash and 50% stock in the company is a good mix. Some suggest eliminating meeting fees, making up for the loss through a more generous annual retainer. There are also many recommendations for reducing the complexity of board compensation. Most experts agree that consulting fees for directors should be eliminated altogether as a conflict of interest.